Microeconomics Study Set 47

Business

Quiz 6 :
The Economics of Political Action

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Quiz 6 :
The Economics of Political Action

No. Outcome of elections are hardly swayed by the choice and vote of a single voter because outcome of elections is based on collective decision-making of the voters. Also, there is divergence between the choice of a voter and the outcome of issue therefore most voters are likely to be less informed on most political matters.

Private firm taking a short-term outlook as compared to the government's long-term outlook does not mean that private firm should not own things like forests with longer gestation period. Although private firms are driven by profit but they also take care of the value of the owned firm and its share price. If the prices of share of the firm is set to increase in next few months-due to belief of the investors that future returns from the investment is good-then private firms can sacrifice the short-term profits for long-term gains. In fact, rights to the residual income from owning things like forest is saleable in current period in the form of private firm's stock. However, the same is not the case with the government-owned firms. They do not have the mechanism which can make the future fruits of current investment available to them. Only if the investment is attractive to the voters today, and only if the voters are willing to pay today for future benefits, the investment will be a political success.

If the government intervention is of protective role then the markets will operate smoothly. Government's protective role comprises of protecting private property rights, maintaining monetary stability, enforcing contracts transparently, and regulating less so as not to restrict entry. This protective role of the government provides the favorable atmosphere in which the markets can function smoothly. However, if the government is protective, then the intervention of the government stifles with the smooth functioning of the markets. It is because over protective and over regulative government breeds misallocate the productive resources in favor of special-interest group and politically favored businesses. In other words excessive government breeds rent-seeking behavior and wasteful use of resources. In general, government intervention is not called for because markets are self-corrective. Any problem with the market is reflected in the reallocation of resources from inefficient uses to more productive uses and the yardstick to reallocation of resources is the change in the consumer's behavior toward the failed business. If a business firm fails, then it will suffer losses and will become unfavorable in the eyes of buyers. Consequently, buyers will shift to more productive business that provides them the highest value to their each dollar spent on the purchase of goods and services.

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