Economics: Government Failure and Public vs. Private Sector

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Questions and Answers

What may managers prioritize over maximizing company profits?

Maximizing shareholder value

Increasing job security

Maximizing their salaries or length of stay in the job (correct)

Minimizing environmental impact

What can be a reason for government failure in administering certain tasks?

Low wages that prevent hiring competent people (correct)

High wages for bureaucrats

Lack of transparency in governance

Over-reliance on technology

In which type of countries may the private sector play a larger role in healthcare?

Poor countries (correct)

Countries with high levels of corruption

Rich countries

Developing countries

What is one way to achieve goals in the healthcare system, according to the 'Competition' approach?

Using financial incentives to achieve goals Signup and view all the answers

What is a characteristic of rich countries in terms of their approach to healthcare?

They can afford to be more involved in healthcare Signup and view all the answers

What is the main difference between the 'Regulation' and 'Competition' approaches to healthcare?

One emphasizes government programs, the other markets and incentives Signup and view all the answers

Why may production be more efficient with a natural monopoly?

Due to economies of scale Signup and view all the answers

What is one way to regulate an industry with market power?

Implement a price cap Signup and view all the answers

Why may governments negotiate with drug companies and doctors?

To set maximum prices Signup and view all the answers

What is an example of government provision?

Building a hospital in a developing country Signup and view all the answers

According to the theory of local capture, what motivates politicians?

The desire to maximize votes from special interest groups Signup and view all the answers

Why might government provision of goods be inefficient?

Because government is a monopoly Signup and view all the answers

What can lead to government failure?

Difficulty in agreeing on objectives Signup and view all the answers

What is a criticism of government provision of goods?

Government may prioritize quick fixes over long-term solutions Signup and view all the answers

What is the primary purpose of informing consumers and providers in government intervention?

To persuade them to act in a certain way Signup and view all the answers

What type of government intervention determines how a private activity may be undertaken?

Regulation Signup and view all the answers

What is characterized by being non-rival and non-excludable?

Public goods Signup and view all the answers

What is an example of a mandate in government intervention?

Employers of a certain size must provide health insurance Signup and view all the answers

What type of government intervention is more typical of developing countries?

Providing Signup and view all the answers

What is an example of a public good in health care?

Control of disease vectors Signup and view all the answers

What is the purpose of taxing certain goods in government intervention?

To discourage consumption of certain goods Signup and view all the answers

What is a characteristic of government intervention in developed countries?

Providing a lot of autonomy if publicly provided Signup and view all the answers

What is the primary reason for market failure in the case of merit goods?

Because people tend to consume too little of them Signup and view all the answers

What is the main issue with public goods?

There is a lack of voluntary contribution for their production Signup and view all the answers

Why do governments intervene in the market to correct the issue of externalities?

To compensate third parties affected by the production or consumption of a good Signup and view all the answers

What is a common example of a merit good?

Compulsory education Signup and view all the answers

Why do factories not pay extra for polluting the air?

Because they are not yet held accountable for the negative externality. Signup and view all the answers

Why do governments often use mechanisms other than price to ration healthcare?

Because perfect competition is not achievable in healthcare Signup and view all the answers

What is a policy option for addressing negative externalities such as air pollution?

Regulating and mandating laws to control pollution. Signup and view all the answers

What is an example of a charitable externality that justifies large social insurance programs?

Providing vaccination campaigns in developing countries. Signup and view all the answers

What is the term used to describe individuals who benefit from public goods without contributing to their production?

Free-riders Signup and view all the answers

What is the primary issue with government intervention in the market?

It may not necessarily make people better off Signup and view all the answers

Why do insurance companies not want to insure people with pre-existing diseases?

Because they can't predict the medical costs. Signup and view all the answers

What is the goal of government intervention in healthcare?

To achieve perfect competition Signup and view all the answers

What is a policy option for addressing incomplete markets in the insurance industry?

Mandating insurance companies to cover people with pre-existing diseases. Signup and view all the answers

What is an example of a merit good?

Health care. Signup and view all the answers

What is an example of an industry with market power?

Hospital and drug companies. Signup and view all the answers

Why do many developing countries have universal health care systems?

Because everyone should have access to health care. Signup and view all the answers

Study Notes

Government Intervention in Health Care Markets

Not all managers aim to maximize company profits, some may prioritize their salaries or job security

Reasons for Public Intervention

Government Failure: lack of capacity to administer, low wages, corruption, and limited taxation ability
Public Goods: non-rival and non-excludable, e.g., disease control, food and water safety
Merit Goods: goods considered good for individuals regardless of their preferences, e.g., compulsory education, wearing seat belts
Externalities: third-party effects, e.g., air pollution, contagious diseases
Incomplete Markets: lack of insurance for pre-existing conditions
Market Power: monopolies, oligopolies, and price controls

Types of Government Intervention

Inform: persuade consumers, providers, and suppliers to act in a certain way, e.g., publicizing health risks
Regulate: determine how private activities are undertaken, e.g., setting standards for doctors and drug trials
Finance: provide health care with public funds, e.g., public funding for health services
Provide: deliver health services using publicly-owned facilities and civil service staff, e.g., crown corporations
Taxes/Subsidies: taxing goods, e.g., cigarettes, and subsidizing health care

Role of Public and Private Sector

No one-size-fits-all approach, depends on the country's income level
Poor countries: larger role for the private sector, due to limited taxation ability and inability to provide health care for all
Rich countries: governments can afford to intervene more in health care, with a focus on regulatory mechanisms and financial incentives

Government Failure

Theory of Local Capture: politicians prioritize special interest groups over the economy
Bureaucracy and Efficiency: government monopoly, lack of efficiency, and preference for quick fixes

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Description

This quiz assesses understanding of government failure, specifically capacity issues and corruption, as well as the role of public and private sectors in different economies. Topics include the motivations of managers and the impact of income levels on economic systems.