Transcript GOVERNMENT AND THE ECONOMY

MARKET FAILURE
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Markets work well when there is
competition and proper incentives
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Low Prices
Considerable Variety
Good Service
Timely Innovation
When markets fail, government may need
to intervene
The Role of Government
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Actor
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Referee
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Collects taxes
Buys goods and services
Produces goods and services
Sets the rules
Impartial judge of rule violations
Imposes penalties for violations
When should government be involved?
Promote Competition
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Large firms may be more efficient
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Large firms may be able to exclude or
weaken competitors
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e.g., Electric power
e.g., Microsoft
Lack of competition can cause high prices
and other problems
Promote Competition
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Government remedies
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Antitrust Laws
Price regulation
Correct for Negative Externalities
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Some activities impose costs on other
than the buyer
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e.g., Pollution
Polluters don’t have to consider the costs
they impose on others
Correct for Negative Externalities
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Markets don’t provide an incentive to
avoid polluting
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Government needs to intervene
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Environmental regulations
Pollution taxes
Correct for Positive Externalities
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Markets may under-provide some goods
and services
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Education
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Benefits the student
Benefits society
Government provides education at less
that its full cost
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Free education for K-12
Subsidized higher education
Ensure Economic Stability
Low unemployment
 Low inflation
 Adequate growth
 Provide an economic safety net (?)
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MORE LATER
Provide Public Goods
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Sometimes, people receive benefits
without paying
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e.g., A national defense system protects
everyone
There is no incentive to pay for national
defense
Public Goods: People can’t be excluded
from the benefits
Provide Public Goods
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Public goods are not well-provided by
markets
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Government could intervene and use its
taxing powers