Question

Consider the following three types of government failure discussed in chapter 11: a. rent seeking behavior b. informational problems c. regulatory capture Decide for the next two questions, which type of government failure does the example best fit:

36. The Interstate We Protect You Commission (IWPYC) was created with the original purpose of protecting consumers from the monopoly power of the auto companies. Now the IWPYC members are all auto company executives, and the IWPYCA now protects existing automobile manufacturers from more competition. 37. Economists convince the federal government that no one can call oneself an economist unless the person is licensed by the federal government to practice economics. Violators are subject to fines of $100,000. Does it really protect the public from bad economists? That’s doubtful, but it decreases the number of practicing economists, which is good for the income of all those who manage to get a license.

Answer 1

Question 36

The given case scenario illustrates that a regulatory authority that was formed to safeguard the interest of consumers from producers has now transformed into the authority that works for safeguard of producers from further competition thereby damaging the interest of consumers.

In a sense, regulator has been captured by those against whom it has to act.

Thus, this illustrates regulatory capture type of government failure.

Question 37

In the given case, by lobbying for licensing requirement to enter the economics profession, economists are creating entry barriers.

Barrier to entry creates rent seeking environment by restricting supply.

Thus,

This illustrates rent seeking behavior type of government failure.