978-0077660772 Chapter 5 Solution Manual

Chapter 05 – Government’s Role and Government Failure

McConnell Brue Flynn 20e

DISCUSSION QUESTIONS

1. Why might citizens interested in maximizing economic efficiency be happy to invest their

government with the right to coerce them in at least some situations? LO1

Answer: The government’s ability to coerce allows it to correct for market failures and to

enforce laws that reduce risks for those engaging in economics transactions. With respect

2. Jean Baptiste Colbert was the Minister of Finance under King Louis XIV of France. He

famously observed, “The art of taxation consists in so plucking the goose as to obtain the largest

possible amount of feathers with the smallest possible amount of hissing.” How does his

comment relate to special interests and the collective-action problem? LO2

Answer: The logic above applies to special interests and collective action as well. In the

3. What is rent seeking and how does it differ from the kinds of profit maximization and profit

seeking that we discussed in previous chapters? Provide an actual or hypothetical example of rent

seeking by firms in an industry. By a union. By a professional association (for example,

physicians, school teachers, or lawyers). Why do elected officials often accommodate rent-

seeking behavior, particularly by firms, unions, and professional groups located in their home

states? LO2

Answer: Rent-seeking is an appeal to the government for special benefits at taxpayers or

someone else’s expense. The term ‘rent’ refers to any payment is excess of the minimum

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Chapter 05 – Government’s Role and Government Failure

Examples will vary. An industry may try to block imports explicitly or implicitly using

tariffs and/or non-tariff barriers. Canada’s beef producers might argue that they are

These groups tend to be politically more active and willing to spend resources supporting

4. How does the problem of limited and bundled choice in the public sector relate to economic

efficiency? Why are public bureaucracies possibly less efficient than firms? LO2

Answer: Limited and bundled choice in the political process tends to reduce economic

efficiency because blocks of public goods and social programs are provided. That is,

The private market is driven by profit. If a company continues to lose money or produces

a good that society does not want it goes out of business. If the public sector, a

5. Discuss the political incentives that helped motivate federal politicians to approve budget

deficits in all but four years between 1960 and 2012. LO2

Answer: Voters like the benefits of increased government spending, but do not like

having to pay the taxes necessary to fund all the costly government programs that they

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Chapter 05 – Government’s Role and Government Failure

6. Explain: “Politicians would make more rational economic decisions if they weren’t running

for reelection every few years.” LO2

Answer: Because political officeholders must seek voter support every few years, they

favor programs with immediate and clear-cut benefits and with vague or deferred costs.

Politicians may make these and other irrational decisions in order to curry favor with the

7. Critique: “Thank goodness we have so many government regulatory agencies. They keep Big

Business in check.” LO2

Answer: Government regulatory agencies sometimes fall under the sway of the

industries that they are supposed to be regulating. Those instances of “regulatory

8. LAST WORD How do the concepts of pork-barrel politics and logrolling relate to the

items listed in the Last Word?

Answer: Both of these political techniques are examples of special interest

effects. “Pork-barrel” politics refers to the practice that congressional

The Last Word contains some examples of public spending that undoubtedly

resulted from such practices. These include the purchasing of equipment that is

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Chapter 05 – Government’s Role and Government Failure

REVIEW QUESTIONS

1. Select all of the following that are true. To an economist, a coercive government can be useful

in order to: LO1

a. Reallocate resources in order to improve efficiency.

b. Fight negative externalities.

c. Ensure low gasoline prices.

d. Provide a low-risk economic environment for individuals and firms.

Answer: The government’s ability to coerce allows it to correct for market failures and to

2. To an economist, any government program is too big if an analysis of that program finds that

MB _______ MC. LO1

a. Is greater than

b. Is less than

c. Is equal to

d. Is less than twice as large as

e. Is more than twice as large as

As with other resource allocation decisions, government programs should only be

3. Tammy Hall is the mayor of a large U.S. city. She has just established the Office of Window

Safety. Because windows sometimes break and spray glass shards, every window in the city will

now have to pass an annual safety inspection. Property owners must pay the $5-per–window cost

—and by the way, Tammy has made her nephew the new head of the Office of Window Safety.

This new policy is an example of: LO2

a. political corruption

b. earmarks

c. rent seeking

d. adverse selection

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Chapter 05 – Government’s Role and Government Failure

Answer: Rent-seeking. This new policy is an example of rent seeking.

By creating the new set of regulations, Mayor Hall has provided her nephew with a way

It is not an example of political corruption because what is being done here is perfectly

legal. Nobody is bribing public officials to either do something illegal or to get them to

perform a service that they should be providing to the public for free. The new policy is

4. A few hundred U.S. sugar makers lobby the U.S. government each year to make sure that it

keeps taxing imported sugar at a high rate. They do so because the policy drives up the domestic

price of sugar and increases their profits. It is estimated that the policy benefits U.S. sugar

producers by about $1 billion per year while costing U.S. consumers upwards of $2 billion per

year. Which of the following concepts apply to the U.S. sugar tax? LO2

Select one or more of the choices shown.

a. Political corruption.

b. Rent-seeking behavior.

c. The collective-action problem.

d. The special-interest effect.

Answer: Rent-seeking behavior, the collective-action problem, and the special-

interest effect.

The economic concepts of rent-seeking behavior, the collective-action problem, and the

The tax is an example of rent-seeking behavior because U.S. sugar producers are

receiving rents—payments in excess of the minimum amount that would be needed to

The tax is an example of the collective-action problem because the benefits of the tax are

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Chapter 05 – Government’s Role and Government Failure

The tax is an example of the special-interest effect because it is maintained thanks to the

lobbying efforts of a special interest group, domestic sugar producers.

Finally, the tax is not an example of political corruption because what is being done here

5. ___________________ occur when politicians commit to making a series of future

expenditures without simultaneously committing to collect enough tax revenues to pay for those

expenditures. LO2

a. Budget deficits

b. Debt Crises

c. Loan guarantees

d. Unfunded liabilities

PROBLEMS

1. Suppose that there are 1 million federal workers at the lowest level of the federal bureaucracy

and that above them there are multiple layers of supervisors and supervisors-of-supervisors.

Assume that each higher level is one-tenth the size of the one below it because the government is

using a 10:1 ratio of supervisees to supervisors. That is, for every 10 workers at the bottom, there

is 1 supervisor; for every 10 of those supervisors, there is 1 supervisor-or-supervisors; for every

one of those supervisors-of-supervisors, there is a supervisor–of-supervisors-of-supervisors; and

so on, all the way up the bureaucratic pyramid to the president. LO1

a. How many supervisors will there be in each supervisory layer of the federal bureaucracy? Start

with the layer of supervisors directly above the 1 million workers at the bottom.

b. How many supervisors are there in total at all levels of the federal bureaucratic pyramid,

including the president?

c. If you count the 1 million workers at the bottom as the first layer of the federal bureaucracy,

how many total layers are there, including the president?

d. How many federal employees are there in total at all layers, including the president?

e. What fraction of all federal employees are supervisory, including the president?

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Answer:

a. 100,000; 10,000; 1,000; 100; 10; 1.

c. 7 total layers corresponding to the 1 million workers at the bottom and then six layers

d. There are 1,111,111 total federal employees (=1 million workers at the bottom +

e. 9.999 percent (which can be rounded up to 10 percent) of all federal employees,

2. Consider a specific example of the special-interest effect and the collective-action problem. In

2009, it was estimated that the total value of all corn‐production subsidies in the United States

totaled about $4 billion. The population of the United States was approximately 300 million

people that year. LO2

a. On average, how much did corn subsides cost per person in the United States in

2009? (Hint: A billion is a 1 followed by nine zeros. A million is a 1 followed by six zeros.)

b. If each person in the United States is only willing to spend $.50 to support efforts to overturn

the corn subsidy, and if anti‐subsidy advocates can only raise funds from 10 percent of the

population, how much money will they be able to raise for their lobbying efforts?

c. If the recipients of corn subsidies donate just one percent of the total amount that they receive

in subsidies, how much could they raise to support lobbying efforts to continue the corn subsidy?

d. By how many dollars does the amount raised by the recipients of the corn subsidy exceed the

amount raised by the opponents of the corn subsidy?

Feedback: Consider the following example: In 2009, it was estimated that the total

value of all corn‐production subsidies in the United States totaled about $4 billion. The

Part a:

On average, how much did corn subsides cost per person in the United States in

2009?

Part b:

If each person in the United States is only willing to spend $.50 to support efforts to

overturn the corn subsidy, and if anti‐subsidy advocates can only raise funds from 10

percent of the population, how much money will they be able to raise for their lobbying

efforts?

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To find the answer to this question we first calculate the number of individuals willing to

fund the anti-subsidy advocates. Since only 10% of 300 million are willing to provide

Part c:

If the recipients of corn subsidies donate just one percent of the total amount that they

receive in subsidies, how much could they raise to support lobbying efforts to continue

the corn subsidy?

Since the recipients of corn subsidies receive a total of $4 billion from the government,

Part d:

By how many dollars does the amount raised by the recipients of the corn subsidy exceed

the amount raised by the opponents of the corn subsidy?

3. Consider a corrupt provincial government in which each housing inspector examines two

newly built structures each week. All the builders in the province are unethical and want to

increase their profits by using substandard construction materials, but they can’t do that unless

they can bribe a housing inspector into approving a substandard building. LO2

a. If bribes cost $1,000 each, how much will a housing inspector make each year in bribes?

(Assume that each inspector works 52 weeks a year and gets bribed for every house he inspects.)

b. There is a provincial construction supervisor who gets to hire all of the housing inspectors. He

himself is corrupt and expects his housing inspectors to share their bribes with him. Suppose that

20 inspectors work for him and that each passes along half the bribes collected from builders.

How much will the construction supervisor collect each year?

c. Corrupt officials may have an incentive to reduce the provision of government services to help

line their own pockets. Suppose that the provincial construction supervisor decides to cut the

total number of housing inspectors from 20 to 10 in order to decrease the supply of new housing

permits. This decrease in the supply of permits raises the equilibrium bribe from $1,000 to

$2,500. How much per year will the construction supervisor now receive if he is still getting half

of all the bribes collected by the 10 inspectors? How much more is the construction supervisor

getting now than when he had 20 inspectors working in part (b)? Will he personally be happy

with the reduction in government services?

d. What if reducing the number of inspectors from 20 to 10 only increased the equilibrium bribe

from $1,000 to $1,500? In this case, how much per year would the construction supervisor

collect from his 10 inspectors? How much less is the construction supervisor getting than when

he had 20 inspectors working in part (b)? In this case, will the construction supervisor be happy

with the reduction in government services? Will he want to go back to using 20 inspectors?

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Answer:

b. $1,040,000 (=20 inspectors times one half times each inspector’s annual total bribe

c. $1,300,000 (=10 inspectors times one half times each inspector’s new annual total

d. $780,000 (=10 inspectors times one half times each inspector’s new annual total

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