Macroeconomics 20th Edition McConnell Solutions Manual Download

Chapter 05 - Government's Role and Government Failure
Solution Manual for Macroeconomics 20th

Edition McConnell Brue Flynn 0077660773
9780077660772
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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
to market failures, the government can use its power to tax, to collect the money
necessary to pay for public goods and to subsidize the production of products that offer
positive externalities. With respect to reducing risk, the government can use its power to
coerce, to both threaten and then punish those engaging in fraud, extortion, and other
unethical business practices as well as to enforce environmental, health, and safety
regulations.
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
case of special interest and collective action, the large gains to the smaller group
motivates these individuals to be more active politically and financially than the larger
group who faces small losses at the individual level. That is, the smaller group will
extract resources from the larger group until it is no longer politically feasible.
5-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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
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...
5-2
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,
instead of evaluating each public good and social program on its respective costs and
benefits the politician chooses all programs together. Some of these goods and programs
may benefit society (positive net benefits), but others may hurt society (negative net
benefits).
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
bureaucracy, fails to use its resources efficiently then the market is not there to discipline
it. In this case, the bureaucracy continues to operate inefficiently and may actually grow
in size in an attempt to 'fix' the inefficiency. However, we need to look carefully at the
logic underlying this argument. Most bureaucratic operations do not provide private
goods. They provide public goods and social services that correct potential market
failures through regulation and direct provision. Thus, the market analogy may not
apply.
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
like. So, politicians have a political incentive to support high levels of spending by only
moderate levels of taxation. A common result is budget deficits, as those political
tendencies promote situations in which spending exceeds tax revenues. To bridge the
gap, governments borrow money, usually by selling bonds.
5-3
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. Conversely, politicians will reject programs with immediate and easily identifiable
costs but with long term, less measurable benefits. Such biases can lead politicians to
reject economically justifiable programs and to accept programs that are economically
irrational.
Politicians may make these and other irrational decisions in order to curry favor with the
voters. But what kind of irrational decisions might be made by politicians who did not
have to face the voters again and stand for reelection?
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
capture” imply that this statement is overly confident in the ability of government
regulatory agencies to keep powerful businesses in check. If regulatory capture occurs,
the captured regulator ceases to be a truly independent watchdog looking out for the
better interests of the public. Instead, it often imposes regulations that reduce
competition and promote high levels of profit in the “regulated” industry.
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
representatives follow when they obtain unneeded benefits for their own districts,
and “logrolling” is a related practice whereby one group of legislators helps
another with the understanding that at some point in the future they, in turn, will
be helped.
The Last Word contains some examples of public spending that undoubtedly
resulted from such practices. These include the purchasing of equipment that is
not asked for by the military and buying equipment from a single firm both to
benefit particular Congressional districts; building projects that are outlandishly
costly; and appropriations bills that are so large, contain so much detail, with
provisions that benefit small groups or individuals.
5-4
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
enforce laws that reduce risks for those engaging in economic transactions.
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
Answer: a, less than.

As with other resource allocation decisions, government programs should only be
expanded up to the point where MB=MC. They are expanded further so that MB<MC,
then they are too big and should be shrunk.
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
5-5
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.
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
special-interest effect apply to the U.S. sugar tax; but the concept of political corruption
does not.
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
keep a resource employed in its current use. This is true because U.S. sugar producers
receive a price that is higher than what would be necessary to get them to continue using
their land, labor and capital to supply sugar.
The tax is an example of the collective-action problem because the benefits of the tax are
highly concentrated among just a few hundred sugar producers while the costs are
disbursed widely over the over 300 million people currently living in the United
States. Thus those who benefit from the tax are highly motivated to lobby Congress to
keep it, while those who are hurt by the tax are only hurt a little bit each—making them
hard to organize into an effective opposition.
5-6
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
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
sugar tax is widely condemned, but it remains true that it is legal for both individuals and
companies to ask politicians for laws that favor their personal interests. And it is also
perfectly legal to make political donations to politicians who support the laws you would
like to see enacted.
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
Answer: 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?
5-7
Answer:
a. 100,000; 10,000; 1,000; 100; 10; 1.
b. 111,111 = (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
of supervisors above them (the 100,000, then the 10,000, then the 1,000, then the
100, then the 10, then the president.)
d. There are 1,111,111 total federal employees (=1 million workers at the bottom +
111,111 supervisors, including the president).
e. 9.999 percent (which can be rounded up to 10 percent) of all federal employees,
including the president, are supervisory.
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?
Answers: (a) $13.33 (b) $15 million (c) $40 million (d) $25 million
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
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
2009?
$13.33 (= $4 billion divided by 300 million)
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?
5-8
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
funding, we have 30 million people providing funding (= 0.10 x 300 million). Each of
these individuals is only willing to provide $0.50. This results in a total funding of $15
million (=$0.50 x 30 million).
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,
1% of this amount is 40 million (= 0.01 x $4 billion).
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?
$25 million (= $40 million - $15 million).
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?
5-9
Answer:
a. $104,000 (=52 weeks times 2 bribes per week times $1,000 per bribe).
b. $1,040,000 (=20 inspectors times one half times each inspector’s annual total bribe
amount of $104,000).
c. $1,300,000 (=10 inspectors times one half times each inspector’s new annual total
bribe amount of $260,000). That annual total bribe amount of $260,000 = $2,500 per
bribe times two bribes per week times 52 weeks per year. The construction
supervisor will personally be happy with this reduction in government services
because it substantially increases his personal income.
d. $780,000 (=10 inspectors times one half times each inspector’s new annual total
bribe amount of $156,000.) The construction supervisor will not be happy with this
reduction in government services. He will want to go back to using 20 inspectors
because he personally received a higher income from bribes when there were 20
inspectors.
5-10

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Chapter 05 - Government's Role and Government Failure

Solution Manual for Macroeconomics 20th

Download full test bank at:

Chapter 05 - Government's Role and Government Failure

McConnell Brue Flynn 20e

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

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

Answer: a, less than.

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

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

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

Answer: d, unfunded liabilities.

$13.33 (= $4 billion divided by 300 million)

$25 million (= $40 million - $15 million).

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