Economics Dr.

Katie Sauer

Chapter 4 Reading Guide: Government and the Economy II I. Government Inefficiency Explain how more government isnt necessarily better.

Governments operate exactly as wed expect them to, given their incentives. DMV example:

Post Office example:

Governments should not be the sole provider of a good or service unless there is a compelling reason to believe the private sector will fail in that role. DMV example vs Post Office example

Even if the government does have a role to play, it does not mean the government must actually do the work. Medicare:

CIA:

II. Markets vs Government The market directs resources to profitable uses. Margarita Space Pak:

Central Planners direct resources according to central planning priorities. (which are sometimes economic and sometimes not) rockets vs birth control: 1

Economics Dr. Katie Sauer

The political process in democracies directs resources according to political priorities. (which are sometimes economic and sometimes not) particle accelerator:

In the private sector, _____________ direct resources where they will earn the ________________. In the government sector, _____________ direct resources where the ________________________.

What are two problems of crony capitalism?

III. Regulations Some regulations are helpful to the economy, some are harmful to the economy, and all have costs associated with them. Why did Milton Friedman argue that more lawyers should be allowed into the practice? Why did many existing lawyers disagree?

Why did the workers in Delhi, India protest the regulation that was imposed in order to clean up pollution?

How does the prohibition of DDT use affect the developing nations?

Not all regulations are created equal the structure matters. Striped bass example:

Economics Dr. Katie Sauer

Sometimes regulations are used to keep out competition. Illinois manicurists:

good citizenship requirements:

Explain how through regulations, the government could be acting as a Helping Hand:

Grabbing Hand:

IV. Taxes Even when the government is engaging in good activities, it must finance its spending through taxes. All taxes exert a cost on the economy. A. Explain Fiscal Drag:

B. Explain how taxes cause individuals to change their behavior and in turn cause deadweight loss.

C. Explain how taxes can discourage investment.

What is the Laffer Curve?

When tax rates are low, explain how cutting taxes will NOT result in more government revenue.

Economics Dr. Katie Sauer

Explain the tax-cuts-increase-revenues fallacy.

V. An Economic Framework for Thinking About the Government A. Government has the potential to enhance the productive capacity of the economy, which makes us better off.

B. Some government activity shrinks the size of the pie but still may be socially desirable.

C. Sometimes government involvement in the economy is purely destructive.

___________________________________________________________________________________ In your own words, summarize the main points of this chapter.