Transcript When Should Government Intervene?:

When Should
Government
Intervene?:
Definitions


Politics is the authoritative
allocation of values in society
Free market: the distribution of
goods and services in society
through voluntary exchange
Justifications for Governmental
Intervention:
Equity concerns override
Efficiency concerns.
 The Market is not Efficient
(Market Failure)


A necessary but not sufficient justification
(Note: government failure)
Efficient Markets


Were the marginal benefit to society
exceeds the marginal cost to society.
Value of a good or service exceeds the
value of the goods or services used to
produce it.
Market failure caused by:
Lack of Competition
 Lack of Information
 Transaction costs
 Presence of Externalities
 Positive
 Negative
 Public Goods (positive externality)

Markets and prices

If a good or service is produced in an efficient
free market:
Price of good or service equals its value to
society.
Lack of competition:

Insufficient number of buyers or
sellers:
Natural Monopolies (utilities)
Market Fixing and collusion.
Effect: artificially high prices, goods tend
to be under produced.
Correction: price and service regulation
Lack of information:

Buyers and Sellers must know
the value of the good they are
buying and selling.
Effect: under or over production
Correction: labeling laws; licenses of
doctors, plumbers; building codes, some
product standards
Negative Externality:

A third party bears the cost of a
transaction between a buyer and
seller.
Effect: good is over-produced
(e.g.: pollution, health insurance)
correction: taxes or regulation
Positive Externality
(Public Goods):

A third party (or Free-rider)
benefits without paying the cost.
Effect: good is underproduced:
(light houses, national defense, fire
protection, education)
Correction: subsidies or government service