Questions for Review with Answers
Chapter 18. Markets and the Government II.
Microeconomic Policy to Rectify a Lack of Equity. An Overview
I. Basics
Chapter 18 – Question 1
Why do economists claim that there is no market failure on factor markets?
* Factor markets are efficient in that they produce maximum total surplus. It is noteworthy that maximum surplus is reached at any wage.
II. The Exploitation of Land and Labour
Chapter 18 – Question 2
An engineer, a plot of land and a robot have in common that they are factors of production and commodities on factor markets. What else do they have in common? What are the differences between them?
* An engineer, a plot of land and a robot have in common that all of them yield incomes to the man who employs them in the production process. But there are also differences between them: The engineer is the most unreliable and unpredictable factor. Provided the employer does not pay interest or rent, he is also the only production factor that claims part of his employer's income in the form of a salary. As he cannot be bought, he does not require an initial investment; but he can, as a result, not be owned either. The use of the engineer and the plot of land is subject to regulations protecting labour and land; the use of the robot is subject to regulations protecting the engineer working with it. When production is given up, the robot and the land can be sold for money; the engineer is fired; sometimes he must be given a statutory redundancy payment.
The obvious difference - that one of the factors is a human being - is normally not considered by economists. Instead, they focus on the marginal products of factors, their costs and the optimum factor mix according to the least-cost rule.
III. Lack of Equity
Chapter 18 – Question 3
What is instrumentalism?
* The view that the observance of ethical standards is of vital importance for the functioning of capitalist economies.
Chapter 18 – Question 4
What is the UN Human Development Index?
* The HDI compares living standards of 177 countries by measuring monetary and non-monetary magnitudes.
Chapter 18 – Question 5
Explain how the quintile method measures inequality.
* All households are divided into five groups of equal size. The division is made according to incomes.
Chapter 18 – Question 6
Do the same for the Gini coefficient.
* The Gini coefficient is calculated by the following formula: The area between the diagonal and the Lorenz curve/The entire area below the diagonal.
* The diagonal illustrates a completely egalitarian distribution of incomes; 20 percent of the population earns 20 percent of incomes. The Lorenz curve illustrates de-facto distribution of incomes.
Chapter 18 – Question 7
To which reasons do economists ascribe income inequality?
* The major reasons for income inequality are inequality of opportunity, inequality of ability, skills and effort, women's lib, which has made the rich richer, and shortcomings of statistics. The latter ignore economic life cycles, i.e. natural variations in incomes owing to young or old age, permanent income, i.e. average incomes during a lifetime, and economic mobility.
There are also economists who acknowledge the inequality of wealth as a source of inequality of income or the exceptional status of corporate board members, who are in a position to determine their own remuneration.
Chapter 18 – Question 8
Explain Okun's bucket theory.
* The theory states that the benefits given to welfare recipients are lower than the costs involved for tax payers.
IV. Public Choice Theory
Chapter 18 – Question 9
Why does Arrow's impossibility theorem state that aggregating individual preferences violates the criterion of transitivity (remember the three voters and the three yoghurt flavours).
* Because, when preferences are aggregated, there are inconsistencies, called intransitivity. For instance, voters prefer A to B and B to C. This would imply that they prefer A to C, which they don't.
Chapter 18 – Question 10
Explain the median-voter theory and what it helps to understand.
* If the hawks and doves have approximately equal numbers of voters to support them, both candidates must woo the median voters to win the election. The theory helps to explain why the platforms of two leading parties become ever more similar.
Chapter 18 – Question 11
Do the same for the rational-ignorance theory.
* The theory states that acquiring all the information on complex subjects that is necessary to make a good judgement is too costly compared with the benefit, which is the influence of one vote on the overall outcome. This theory helps to explain poor polls and the success of candidates who simplify issues and offer ideological answers.
If you like, print this page for offline comparison or studying.