Government Failure

Learning Objective

• Identify why government programs are often inefficient and sometimes even destructive

• What does the DMV example tell us about the problems with a government monopoly?

• What are the two broader lessons to be learned about the government role in the economy? 82-83

Two Lessons

• Government should not be the sole provider of a good or service UNLESS there is compelling evidence the private market will fail (public goods for example)
• Even if Government has a role it does not follow it has to actually do the work

• How does politics corrupt the process of government intervening in the economy? 86-87

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Politics

• What makes economic sense does not always make political sense
• Rent Seeking Behavior = The Use of government subsidies and regulations for personal profit rather than public gain
• Government can forcibly take money with support (or ignorance) of 51% of the population

Public Choice Theory

Government costs are dispersed but benefits are concentrated.

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What is the “fiscal drag” and what two impacts does it have on the economy (94)

Taxes

• a situation where a government's net fiscal position (equal to its spending less any taxation) does not meet the net savings goals of the private economy.
• Results from two things:
• Taxes take money out of our pockets
• Taxes cause us to change our behavior (.i.e. Work less buy less)

• What is a “deadweight loss”? How does taxation fall into this definition? (94)

Deadweight loss

• What kinds of things are discouraged by taxation? (95-96)

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Discouraged by taxation

Investment

Work

Current Tax Rates

• What is “supply-side economics”? (97)

Laffer Curve

What are the basic ideas about government in the author’s summary? Explain each. You should be crystal clear on these points.

• Some government action increases the productive capacity of the economy
• Some government activity shrinks the size of the pie but may be socially desirable
• Some government action is purely destructive

GOP Tax Cuts

GOP Tax Cuts

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