Chapter 05 – Government’s Role and Government Failure
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Chapter 05 – Government’s Role and Government Failure
McConnell Brue Flynn 21e
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
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
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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
amount that is necessary to keep the resource employed in its current use.
Rent-seeking is different from profit maximization because rent-seeking attempts to
influence the political process to gain increased profit or income. Standard profit
maximization and profit seeking is driven by market forces, such as new products, cost
minimization, etc…
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
concerned about mad-cow disease to block imports of U.S. beef. A union may restrict
access to employment or negotiate as a block to keep wages higher than the market wage.
Professional associations may require certification and testing to actively participate in
the market.
These groups tend to be politically more active and willing to spend resources supporting
individuals who support their respective objectives. Thus, a politician is likely to support
their activities.
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,
5. Discuss the political incentives that helped motivate federal politicians to approve budget
deficits in all but five years between 1960 and 2015. LO2
Answer: Voters like the benefits of increased government spending, but do not like
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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
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
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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.
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
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
Chapter 05 – Government’s Role and Government Failure
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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
to collect an economic rent, which by definition is a payment in excess of the minimum
amount needed to keep an economic resource employed in its current use. In this case,
all of the city’s windows would have kept on being employed in their current use—as
windows—even without the new window inspection fees. Thus the entire $5-per-
window fee that is collected by her nephew will be an economic rent.
By contrast, the window-inspection policy is not an example of political corruption,
earmarks, or adverse selection.
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
stupid, but Tammy’s nephew will in fact be obeying the law when making inspections
and demanding $5 for each one. So there is no political corruption going on here.
There are also no earmarks because this new policy has nothing to do with legislators
authorizing special expenditures for political supporters or friends.
Finally, this law has nothing to do with adverse selection because it has nothing to do
with one party to a contract possessing more information than another party to the
contract.
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.
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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
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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?
Answer:
2. Consider a specific example of the special-interest effect and the collective-action problem. In
2012, it was estimated that the total value of all corn‐production subsidies in the United States
totaled about $3 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
2012? (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?
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Feedback: Consider the following example: In 2012, it was estimated that the total
value of all corn‐production subsidies in the United States totaled about $3 billion. The
population of the United States was approximately 300 million people that year.
Part a:
On average, how much did corn subsides cost per person in the United States in
2012?
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?
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?
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?
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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?