英文版微观经济学复习提纲Chapter 14. Govern

14GovernmentInterventionintheMarketChapterSummaryThegovernmentplaysasignificantroleinanyeconomy.Althoughcompetitiveprivatemarketsprovidethebestmechanismforallocatingsociety’sresources,thereareoccasionswhengovernment’sneedtointerveneinthesemarkets.Forexample,governmentsarerequiredtoenforcetheruleoflaw,particularlyovercontractandpropertyrights,ortoovercomeexternalities.However,whilstgovernmentinterventionissometimesnecessary,therearealsosituationswheregovernmentinterventionoccurs,butisnotrequired.Forexample,theprivateinterestviewstatesthatpoliticianscansometimesinterveneinmarketslargelybecauseoftherent-seekingclaimsofasmallgroupofindividualsorfirms.Thistypeofinterventionleadstogovernmentfailure,asthenetresulttotheoveralleconomyisoftenalossofefficiency.Thedifficultyincorrectlypricinginsurancepoliciesstemsfromasymmetricinformation,whichhappenswhenonepartytoatransactionhaslessinformationthantheotherparty.Asymmetricinformationisalsopresentinthemarketforusedcars.Asymmetricinformationleadstoadverseselection.Adverseselectionoccurswhenonepartytoatransactiontakesadvantageofknowingmorethantheotherparty.Theinsuranceindustryisalsosubjecttomoralhazard,whichisthetendencyofpeopletochangetheiractionsbecausetheyhaveinsurance.Insurancecompaniesusedeductiblesandco-paymentstoreducemoralhazard.Adverseselectionandmoralhazardalsoaffectfirmsandinvestorsinfinancialmarkets.Whenafirmhassoldstocksandbondsitmayspendthefundsinwaysnotintheowners’bestinterests.Sincetheownersofthefirm’sstockalsoownthefirmitself,thiscanbeamajorproblem.Moralhazardcanalsobepresentinlabourmarkets.Oncehired,workersmayshirktheirobligationsandnotworkhard.Firmsmaydealwiththisformofmoralhazardbycloselymonitoringworkersandmakingtheirjobsseemmorevaluablethanotherjobs.LearningObjectivesWhenyoufinishthischapteryoushouldbeableto:1.KnowthenatureandextentofgovernmentexpenditureinAustralia.ThegovernmentplaysasignificantroleinAustralia’seconomy,accountingforaround16%oftotalemployment,and22%ofGDP.ThemainexpendituresoftheAustraliangovernmentareinsocialsecurityandwelfareandhealth.2.Understandwhyamarketeconomywithcompetitionisgenerallyefficient.Chapter5outlinesinmoredetailhowacompetitivemarketresultsintheeconomicallyefficientlevelofoutput.Inacompetitivemarket,theinteractionbetweensupplyanddemandresultsinanequilibriumpriceandquantity,wherethemarginalbenefittoconsumersfromthelastunitconsumedequalsthemarginalcostofprovidingthatunit.3.Understandtheeconomicbasesforgovernmentinterventioninamarketeconomy.Thereareanumberofsituationswheregovernmentinterventionisrequired,tocorrectinstancesofmarketfailure.Theseinclude:theruleoflaw,maintainingcompetitivemarkets,naturalmonopolies,externalities,commonresources,publicgoods,meritgoods,asymmetricinformation,equityandmacroeconomicstabilisation.Governmentinterventioninthemarket2104.Distinguishbetweenmarketfailureandgovernmentfailure.Marketfailureoccurswhenthemarketdoesnotresultinaneconomicallyefficientoutcome.Governmentfailurecanoccurwhenregulationsareenforcednottoimproveefficiency,buttoprotectcertainvestedinterests.5.Defineasymmetricinformationanddistinguishbetweenmoralhazardandadverseselection.Asymmetricinformationoccurswhenonepartytoaneconomictransactionhaslessinformationthantheotherparty.Adverseselectionreferstoasituationinwhichonepartytoatransactiontakesadvantageofhavingmoreinformationthantheotherparty.Moralhazardoccurswhenpeoplechangetheiractionsasaresultofhavinginsurance.6.Applytheconceptsofadverseselectionandmoralhazardtofinancialmarkets.Asymmetricinformationexistsinfinancialmarketsbecausefirmsknowmoreabouttheirfinancialsituationthandopotentialbuyersofitsstockandbonds.Moralhazardexistsinfinancialmarketsbecausefirmsmayusefundsraisedthroughthesaleofstocksandbondstoreduceprofitsorevenstealfunds.Thelargerthefirmandthemorecarefullyanalystsfollowtheiractivities,thelesslikelymoralhazardwillbeaproblem.ChapterReviewChapterOpener:SellingNoodlesisHarderThanYouThinkThechapteropeneroutlinesthecaseofKenLee,amigranttoAustraliafromHongKong.MrLeewantedtosetuparestaurantinCanberra,followingonfromthesuccessfulrestaurantheraninHongKong.However,theregulatoryburdenshefacedintryingtosethisbusinessup,includinghealthandsafetyregulationsandcompulsorystafftrainingrequirements,plustheadditionallabourmarketregulations,ledhimtoquestionwhetheritwasworthwhiletosethisbusinessupinthefirstplace.Thischapterlooksatthe(economicroleofthegovernmentintheAustralianeconomy.TheSizeofthePublicSectorThereareanumberofwaystomeasurethesizeofthepublicsector:governmentproductionasaproportionofGrossDomesticProduct(22%inAustraliain2007/8,orpublicsectoremploymentasaproportionoftotalemployment(16%inAustraliain2007/8,orbypublicexpenditureasaproportionoftotalexpenditure(35%inAustraliain2007/8.Thisfinalmeasureislargerduetothefactthatthegovernmentalsomakestransferpaymentstoindividualsandhouseholds(pensions,unemploymentbenefitsandsoon.Inrelativeterms,thesizeofAustralia’spublicexpenditureissmallerthantheUK,CanadaandScandanaviancountries,butasimilarsizetotheUS,JapanandSwitzerland.Althoughgovernmentexpenditure(netoftransferpaymentshasfluctuatedsince1960,therewasageneralupwardstrendthroughtomid-1980sandthenadeclineuntil2003.Thisdeclinewasduetomicroeconomicreformsundertaken,andthefactthatmanypublicenterpriseswereprivatisedduringthisperiod.Intermsofthewherethegovernmentspendsitsmoney,thegreatestsharegoestowardssocialsecurityandwelfare(41%in2007/8,followedbyhealth(18%andgeneralgovernmentservices(14%.TheEconomicBasesforGovernmentInterventionWehavelearntinpreviouschaptersthatcompetitivemarketsproducethemosteconomicallyefficientuseofresources.Whilstanyinterventioninthesemarketsbygovernmentsthatdirectlydistortsoutcomeswillresultinalossofefficiency,therearestillanumberofareaswhereeconomistsbelievegovernmentinterventionisa211Chapter14necessity.Theseofteninvolvesituationsofmarketfailure,andinclude:•Thelegalsystemandruleoflaw(legislationisrequiredtoenforceprivatecontracts;•Maintainingorenforcingcompetition(inefficienciescanarisewithmonopoliesorcollusivebehaviourbetweenfirms,andsothegovernmentneedtoregulatetoensurecompetitive,oratleastcontestable,marketsexist;•Naturalmonopolies(whereeconomiesofscalearesolargethatonefirmcansupplytheentiremarketatalowercostthantwoormorefirmscould;•Externalities(abenefitorcostthataccruestothirdpartiesnotdirectlyinvolvedintheproductionorconsumptionofagood–thesearecoveredinChapter15;•Commonresources(anextremecaseofexternalities,wherenoonecanbedeniedaccesstoaresource,buttheiruseofthatresourcereducesthepossibleuseofothers–thesearealsocoveredinChapter15;•Publicgoods(whereconsumptionofagoodorserviceisbothnon-rivalandnon-excludable,thegovernmentmustprovidethisproducttoovercomethemarketfailureof‘free-riding’;•Meritgoods(goodsthataredeemedtobebeneficialtosociety,suchasmuseumsandgalleries,thatmightotherwisenotbeprovidedbytheprivatesector;•Asymmetricinformation(regulationisrequiredmayberequiredtoreducetheproblemsthatoccurwhenonesideofamarkethasaccesstoinformationnotavailabletotheotherside–seebelowformoredetails;•Equity(ofteninvolvenormativejudgementsaboutwhatis‘fair’,andsothegovernmentmayinterveneifaspecificmarketequilibriumisdeemedinequitable;•Stabilisation(macroeconomicpolicy(policiesthataimtostabilisetheoveralleconomy,andprovidelowunemployment,lowinflationandstrongeconomicgrowth.MarketFailureandGovernmentFailureAlthoughtheremaybearoleforgovernmentsincasesofmarketfailure,othersarguethat,foravarietyofreasons,theremayalsobegovernmentfailurethatcanactuallymakeasituationlessefficient.Forexample,theprivateinterestviewstatesthattherent-seekingbehaviourofgroupsandindividualscancausegovernmentfailure.Rent-seekingbehaviouristheunproductiveactivityofanindividualorgroupinthepursuitofeconomicsurplusabovethatwhichwouldresultinacompetitivemarket.Lobbyistsmaybeemployedbyanindustry,forexample,toconvincepoliticianstoenactormaintainspecificprivilegesforthatindustry.Thiscanoftenoccurbecausethesegroupsaremorevocalincomparisontothegeneralpublic,whomaynotknow(orcareofthebenefitstheywouldotherwisereceive.Examplesofthisincludelobbyingbysmallbusinesstomaintainrestrictedtradinghours(seeAnInsideLookonpage456,orbyprofessionalgroupswhotrytorestrictentryintotheirprofessionto‘protectthepublic’,butwhichthereforerestrictssupplyandkeepstheirwageshigh.Whilstnotallinterestgroupscouldbeconsidered‘rent-seekers’,itisstillimportanttounderstandtheactionsofthesegroupswithrespecttoregulationintheeconomy.Insomesituations,economicefficiencycanbeimprovedthroughderegulationand/orprivatisation.Deregulationcanpromotecompetitionbyreducingbarrierstoentry,aswiththeAustraliantelecommunicationsindustryinthe1990s.Theprivatisationofgovernmentbusinessenterprises(GBEsinAustraliawasanothermethodofpromotingefficiencyduringthe1990s.Duringthisperiod,manyGBEsweresold,includingstateelectricityandgasassets,aswellastheCommonwealthBank,QantasandTelstra.Whilstderegulationdoesnotguaranteeeconomicefficiencywillimprove,theexperienceinmanyindustriessuggestthatthisoftenoccurs.Governmentinterventioninthemarket212HelpfulStudyHintMakingtheConnection14.1(page442looksattheissueofwhetherdrugsshouldbelegalised.AlthoughtheconsumptionandsupplyofmanyspecificdrugsarecurrentlyillegalinAustralia,someacademicsbelievethatthistypeoflegislationincursgreatercosts(throughenforcementcostsandthelikethanbenefits.MiltonFriedman,forexample,wasastrongadvocateofthefreedomofindividualsandalackofregulationandcontrolbygovernments.Nevertheless,itisimportanttorememberthatwhileeconomicscancontributetothiscontroversialdebate,themoralissuesandsocietalpreferencesareoftenmoreimportantindecidingthesetypesofissues.Don’tLetThisHappentoYou(page444alsoexaminestheissueofassessingtherelativecostsandbenefitsofregulation,andtheopportunitycostsassociatedwiththesedecisions.TheLegalSystemForamarkettofunctionefficiently,participantsmustbeconfidentthatthecontractstheyenterintowillbehonouredand,iftheyarenot,thattheywillbeabletoseekredressthroughthecourtsystemforcompensation.IncountrieslikeAustralia,therearefairlywellestablishedregulatoryandlegalmechanismsinplacethatprovideforthiscertainty.Inmanydevelopingcountries,however,theruleoflawislesswell-established,andmarkettransactionsareoftenthereforeslowerandlessefficient.Thegovernmentalsohasaroletoplayintheenforcementofpatentsandcopyright.Thissystemisdesignedtoprovideprotectionforaperiodoftimeoverintellectualproperty,andisarewardforundertakingcostlyresearchanddevelopment.Withouttheenforcementoftheserules,firmswouldbeunwillingtoundertakethisresearchanddevelopmentinthefirstplace,whichwouldhampertechnologicalprogress.InformationThedifficultyincorrectlypricinginsurancepoliciesarisesfromtheproblemofasymmetricinformation.Asymmetricinformationisasituationinwhichonepartytoaneconomictransactionhaslessinformationthantheotherparty.Guardingagainsttheeffectsofasymmetricinformationisamajorobjectiveofsellersintheinsurancemarketandofbuyersinfinancialmarkets.Thestudyofasymmetricinformationbeganwiththestudyofusedcarmarketsorthemarketfor“lemons”byGeorgeAkerlof.Sellersofusedcarshavemoreinformationaboutthecarstheysellthandobuyers.Mostusedcarsofferedforsalewillbelemons.Thisisduetoadverseselection.Adverseselectionisasituationinwhichonepartytoatransactiontakesadvantageofknowingmorethantheotherpartytothetransaction.Usedcardealerscantakestepstoassurebuyerstheyarenotsellinglemonsbyofferingwarrantiesthatguaranteerepairorreplacementoveracertaintimeperiod.Sellerscanalsobuildareputationforsellingreliablecars.Buyersofinsurancewillalwaysknowmoreaboutthelikelihoodoftheeventbeinginsuredagainstthanwillinsurancecompanies.Insurancecompaniescovertheircostsonlyiftheysettheprices(premiumsoftheirpoliciesatlevelsthatreflecthowmanyclaimsforpaymentthepeopletheyhaveinsuredarelikelytosubmit.Theadverseselectionproblemcanbereducedifpeopleareautomaticallycoveredbyinsurance.Forexample,stategovernmentsrequiredriverstohaveautomobileinsurance.Adverseselectionproblemscanalsobereducedbyofferinggroupcoveragetolargecompaniesandotherorganizations.Theinsurancemarketisalsosubjecttomoralhazard.Moralhazardisthetendencyofpeoplewhohaveinsurancetochangetheiractionsbecauseoftheinsuranceor,morebroadly,actionstakenbyonepartytoatransactionthataredifferentfromwhattheotherpartyexpectedatthetimeofthetransaction.Anexampleof213Chapter14moralhazardisafirmthathastakenoutfireinsurancemaybelesscarefulaboutavoidingfirehazards.Insurancecompaniesusedeductiblesandco-paymentstoreducemoralhazard.HelpfulStudyHintMakingtheConnection14.2(page450looksattheissueofmoralhazardandadverseselectioninthehealthinsurancesystem.Forexample,becauseinsurancecompanieswerenotallowedtochargedifferentpremiumstopeoplebasedonage,theseaveragepremiumswerehigherthantheywouldotherwisebe.However,thesehighercostsdissuadesomelow-riskpeoplefromtakingouthealthinsurance,meaningthattheinsurancecompaniesmaydisproportionatelyattractthemoreunhealthymembersofsocietywhoclaimfrequentlyforservices,whichmayraiseaveragepremiumsevenfurther.Thisexampleofadverseselectionwasonereasonforthefederalgovernmentintroducingincentivesforpeopletotakeouthealthinsurancein2001.AdverseSelectionandMoralHazardinFinancialMarketsAdverseselectionandmoralhazardposeproblemsforfirms,theirownersandownersoftheirdebtinmarketsforstocksandbonds.Sincefirmsknowmoreabouttheirfinancialsituationsthanstockholders,thefirmcanusethefundsinwaysthatreduceprofits.Forexample,afirmthathasnodebtonthebalancesheetmaysuddenlyissuealargequantityofbonds.Thisincreasestherisktocurrentownersoftheirstock.Thisisanexampleoftheprincipal-agentproblem,wheretheagent(forexample,themanagerofabusinesspursuestheirowninterestsratherthantheinterestsoftheprincipal(theowners.InAustralia,theregulationoffinancialmarketswasoverhauledinthe1990sfollowingtheWallisReportin1996.ThisresultedintheestablishmentoftheAustralianPrudentialRegulationAuthority(APRA,andtheAustralianSecuritiesandInvestmentsCommission(ASIC.However,givenrecenteventsinfinancialmarketsacrosstheworld,itisclearthattheregulationofthesemarketshasnotovercometheproblemsofadverseselectionandmoralhazard.HelpfulStudyHintMakingtheConnection14.3(page454describesthedifficultythatmoralhazardposesforinvestorsbyexaminingthecollapseofOne.TelandinsurancecompanyHIHin2001.Governmentinterventioninthemarket214SolvedProblemChapter14includesoneSolvedProblemtosupportlearningobjective5(“Defineasymmetricinformationanddistinguishbetweenmoralhazardandadverseselection”.ThefollowingSolvedProblemsupportsanotherofthischapter’slearningobjectives.SolvedProblem14.2Supportslearningobjective4:“Distinguishbetweenmarketfailureandgovernmentfailure”.RestrictionsOnTaxisAddOneThirdToAverageFareThefollowingisapressreleasefromtheNationalCompetitionCouncilpertainingtoareviewoftaxicablicencesinAustraliain2000:“Lawsthatrestrictthenumberoftaxisonourroadsdonothingtoimprovetaxireliability,availability,safetyorcleanliness”,MrGraemeSamuel,PresidentoftheNationalCompetitionCouncilsaidtoday.TaxilicencerestrictionsexistinallAustralianStates,excepttheNorthernTerritory,andhavebroughtaboutasteadydeclineinthenumberoftaxisperheadofpopulation.Taxilicencescostbetween$250,000to$300,000.ThepricehasrisensteadilyovermanyyearsasStateGovernmentshavenotissuedsufficientnewlicencestomeetincreasingcustomerdemand.Themassivecostoflicencesaddsaroundonethirdtoanaveragetaxifare.InSydneyalone,thecosttocustomersoftherestrictionshasbeenestimatedataround$75millionperannum.Issuingmorelicenceswouldmakeowningataxicheaper,couldreducefaresandwouldmaketheoperationofpart-timetaxiscommerciallyviable.Parttimetaxisallowmajorpeaks(suchasFridayandSaturdayevenings,airportpeaksandshiftchange-overtimestobebetterserviced.Ifthecostsofownershipsignificantlydecreasedcurrentdriverscouldfeasiblyowntheirowntaxisandbeselfemployed.Currently,aroundhalfofalltaxilicencesareownedbyinvestorsandmostdriversareemployeesorleaselicencesfromtheowners.Governmentswouldstilllegislateforstandardsofroadworthiness,driverpresentationandknowledgeandtaxiuniformity,aspartofthelicencequalification.TheDiscussionPaperhighlightsthedisadvantagestocustomersunderthecurrentarrangementsanddetailshowtaxidriverswouldbebetteroffifrestrictionsontaxinumberswerelifted.However,whilstthecurrentrestrictionsclearlyworkagainsttheoverallcommunityinterest,removinglicencerestrictionswouldresultinsignificantpaperlossestothosepeoplewhocurrentlyholdtaxilicences.Consequently,thetaxiindustryhasinvestedsignificanttimeandmoneytoensurethatgovernmentsretainthelegislativerestrictions.Onereformoptionisa‘buyback’programthatoffersexistinglicenceholdersfullcompensationatmarketprices...Astagedreformprogram,whilstdelayingbenefitstoconsumerswouldallowtheindustrysometimetoadjusttoincreasingcompetitionandtheloweringoflicenceprices.But,previousstagedreformproposalshavebeenthwartedbypowerfulindustrylobbying.InVictoria,a1986stagedreformproposalwasessentiallyabandoned,andlicencevaluesdoubledovertheensuingfouryears.”Source:NationalCompetitionCouncilPressRelease,May2000.Accessedat:(aExplainwhythemarketpriceforataxicablicenceisaround$250,000-$300,000.(bUsethepassagetodistinguishbetweenandevaluatethedifferenttypesofgovernmentregulation.215Chapter14SolvingtheProblemStep1:Reviewthechaptermaterial.Youmaywanttoread“MarketFailureandGovernmentFailure”sincethisproblemreferstothematerialinthissectionofthetextbookwhichbeginsonpage442.Step2:(aInallstates(bartheNorthernTerritory,theissuanceoftaxilicencesishighlyregulated,withthegovernmentdeterminingthenumberoflicencesavailable.Becausethesupplyoftheselicencesisfixed(oratleastgrowsinanadhocmanner,whilstdemandfortaxirideshasincreasedwithincreasesinthepopulationsinurbanareas,thepriceofeachoftheselicenseshasgrownsignificantlyovertime.Thehighcostoftheselicencesneedtoberecoupedbytheselicenceholders,whichultimatelyaddstothecostofataxifare.Step3:(bThisarticlenotesthattherearetwotypesofregulationinthismarket.Firstly,thereareregulationssurroundingissuessuchasensuringtheroadworthinessoftaxis,presentationofdrivers(includingchecksforpriorcriminalconvictionsandsoon.Theseregulationswouldbeconsideredbymostpeopletobereasonable,inthesensethattheypromoteconfidencefrompeoplewithrespecttosafetystandards.However,theothertypeofregulationsurroundshowmanylicencesareavailable,anditisthisareawheremanyeconomiststakeissue.Byspecificallyrestrictingsupply,thepricepaidbyconsumersforataxirideishigherthanitwouldotherwisebe.Thearticlealsonotesthestrongresistancefromtaxidriverstothederegulationofthisindustry(“…thetaxiindustryhasinvestedsignificanttimeandmoneytoensurethatgovernmentsretainthelegislativerestrictions”.Thisisanexampleofthe‘privateinterestview’discussedinthetext.Theotherissuesurroundstheproblemofcompensationforpeoplewhohaverecentlyboughtlicencesathighprices,andwhowouldbesignificantlyworseoffintheindustryweretobederegulated.However,thisissuecouldpotentiallybedealtwithinanumberofways(suchasthe‘stagedreform’mentionedabove,andwouldonlyapplytothesmallnumberoflicencesthathavechangedhandsrecently.Self-Test(AnswersareprovidedattheendoftheSelf-Test.Multiple-ChoiceQuestions1.ThesizeofthepublicsectorinAustraliais:a.MuchlargerthaninJapanortheUS.b.OfasimilarsizetothepublicsectorinUKorItaly.c.OfasimilarsizetothepublicsectorinJapanortheUS.d.MuchlargerthanintheUKorItaly.2.Overthepastfortyyears,thesizeofthepublicsectorinAustraliahas:a.BeencontinuallyincreasingasaproportionofGDP.b.BeencontinuallydecreasingasaproportionofGDP.c.Wasgenerallydecreasinguntilthemid-1980s,andhasbeengenerallyincreasingsincethen.d.Wasgenerallyincreasinguntilthemid-1980s,andhasbeengenerallydecreasingsincethen.3.Governmentinterventioninprivatemarketsisgenerallyacceptedwhen:a.Themarginalbenefitofthegoodorserviceisequaltothemarginalcostofprovidingthatgoodb.Thepriceofagoodistoohighc.Therearebenefitsorcostsimposedonsomeonewhoisnotdirectlyinvolvedintheproductionorconsumptionofthatgoodorserviced.Alloftheabove.Governmentinterventioninthemarket2164.Acontestablemarketisonewhere:a.Therearemanyfirmscompetinginthemarketb.thereisthepotentialforcompetitionduetolowbarrierstoentryandexitc.thereisonlyonefirmthatcansupplythemarketatapricelowerthantwoormorefirmscouldd.noonecanbedeniedaccesstotheresourcebutoneperson’useoftheresourcesreducesthepossibleuseofothers.5.Anexampleofacommonresourceis:a.Themarketforlemonsb.Oceanfisheriesc.Pollutiond.Electricitygeneration6.Publicgoods:a.Arenon-rivalandnon-excludableb.Attractapricepremiumbyprivateconsumersc.Ariseduetoasymmetricinformationd.Areconsideredtobeofbenefittosociety,whethertheywantthemornot.7.Rent-seekingbehaviour:a.Onlyoccurswhenmarketsareefficient.b.Isanunproductiveactivitydesignedtoearnanindividualorfirmaneconomicsurplusabovethatwhichtheywouldnormallyearninacompetitivemarket.c.Isaproductiveactivitythatallowsafirmorindividualtoearnaneconomicsurplusabovethatwhichtheywouldnormallyearninacompetitivemarket.d.Noneoftheabove.8.Accordingtotheprivateinterestview:a.Governmentfailureoccursbecausethegovernmentintervenesinamarket.b.Governmentfailureisavoidedbecauseprivateinterestswillalwaysensurethecompetitiveoutcome.c.Rent-seekingbehaviouronthepartofinterestgroupscanleadtogovernmentfailure.d.Marketfailurecanonlybeovercomebygovernmentintervention.9.Governmentfailurecanoccurwhen:a.Theinterestsofasmallgroupinfluencethepoliciesofagovernmenttothedetrimentoftheoveralleconomy.b.Thegovernmenttriestoregulateanindustry.c.Thegovernmentrefusestoregulateanindustry.d.Theinterestsoftheoveralleconomytakeprecedenceovertheinterestsofasmallgroup.10.InAustralia,deregulationduringthe1980sand1990swasdesignedto:a.Decreasethelevelofcompetitioninmarketsinordertoachieveeconomiesofscale.b.Increasethelevelofcompetitioninmarketsbyencouragingrent-seekingbehaviour.c.Overcomesituationsofmarketfailure.d.Reducegovernmentinterventioninmarketsbypromotingcompetition.217Chapter1411.Oneofthereasonsforgovernmentfailureisthat:a.Governmentsareincapableofovercomingmarketfailure.b.Thebenefitsofcertaingovernmentactionsoftenaccruetoasmall,vocalminority,butthecostsarespreadwidelyacrosseveryoneelse.c.Thebenefitsofcertaingovernmentactionsareoftenspreadwidelyacrosssociety,butthecostsaccruetoasmall,vocalminority.d.Governmentregulationalwaysmakesthesituationworsethaniftheyhadleftthemarketalone.12.Patentsandcopyrightprotectionareanexampleof:a.Governmentfailure.b.Rent-seekingbehaviour.c.Publicgoods.d.Propertyrights.13.Theruleoflawinaneconomyisimportantbecause:a.Itreducestransactioncostsbetweenparties.b.Itimprovestheefficiencywithwhichresourcesareemployed.c.Itpromotesconfidenceintheoperationofthemarketsystem.d.Alloftheabove.14.Whatisthereasonfortheexistenceofasymmetricinformation?a.Asymmetricinformationexistswhenpeoplewhohaveinsurancechangetheiractionsbecauseoftheinsurance.b.Asymmetricinformationexistswhenonepartytoaneconomictransactionhaslessinformationthantheotherparty.c.Asymmetricinformationexistswhenpartiestoaneconomictransactionmustpaydifferentpricestoobtainthesameinformation.d.Asymmetricinformationexistswhenadverseselectionleadstomoralhazard.15.Ifpotentialbuyershavedifficultyseparatinglemonsfromgoodusedcars,whatwilltheydo?a.Theywilltakethisintoaccountinthepricestheyarewillingtopay.b.Theywillnottakethisintoaccountinthepricestheyarewillingtopay.c.Theywillbeabsolutelyindifferentbetweencars,andwil