Presentation on theme: "Chapter 10: The Microeconomy and The Government zThis chapter examines what government can do to remedy problems of market power and market failure in."— Presentation transcript:
Chapter 10: The Microeconomy and The Government zThis chapter examines what government can do to remedy problems of market power and market failure in an economy. zThe chapter also examines practical problems for government in trying to remedy problems. zShould the government intervene in trying to solve problems, or let the problems solve themselves?
Remedying Market Power: Leveling the Playing Field zPassing and enforcing anti- discrimination legislation (civil rights, gender, age, etc.). Note they don’t change social perceptions (should they?). zNorth American Free Trade Agreement (NAFTA) – free trade among US, Canada, and Mexico. zLabor Unions – giving labor equal leverage to bargain with employers.
Remedying Market Failure: Providing Public Goods zGovernment provides Public Goods (e.g. military protection). zPublic Goods solve free rider problem by taxing everyone to pay for these goods.
Attempting to Remedy Market Failure: Externalities zGovernment passes and enforces legislation protecting community property (clean water, clean air). zGovernment places an additional tax or fine on the offending entity. zTheoretically, this tax or fine should be equal to the External Cost from the action, so that the MPC + (tax or fine) = MSC.
Problems in Attempting to Remedy Externalities zFinding sufficient evidence of harm (e.g. secondhand smoke). zFinding sufficient evidence of blame (e.g. acid rain). zPlacing a dollar value on External Cost (e.g. noise, lack of sleep, aesthetic loss).
Should Government Intervene? zInterventionist – a position which asserts that government is capable of forming effective solutions to distortions and inefficiencies in an economy. zNon-Interventionist (laissez-faire) – a position which asserts that free markets are best at solving distortions and inefficiencies, and that government is at best part of the problems.
Criteria for Assessing Positions zHow well does the market system actually work? zHow closely do the conditions of the economy actually approximate the “nice assumptions”?
More Criteria zIs government a potential source of rent-seeking and rent-maintenance, either through doing things to benefit themselves, or special interest groups? zIs government wise enough to spot the inefficiencies accurately, and to propose, pass, and enforce effective solutions? zIs the “web of connections” just too complicated for government to tinker around with a piece?
Government Policy and Distributive Justice zHow much should government take care of the poor, or disadvantaged groups? zHow much should government strive for greater equality in income distribution? zHow much should government strive to provide most if not all with a reasonable standard of living (e.g. “living wage”)?
Sacrificing Equity for Efficiency: Rent Controls zExperiment – In New York City after World War II, city created subsidized housing for middle-class World War II veterans. zRents were well-below market, and were guaranteed until death. zIn graph, Demand > Supply. Out of equilibrium, and kept out by restriction. zCreated increased shortages for this housing over time, stunted the growth of new housing.
So Should Government Intervene? zReasonable people can disagree. zHow well does the market economy work on its own? zHow well does the government work? zHow problematic is the status quo? zMarginal Benefit versus Marginal Cost of government intervention. zBased upon individual values and perceptions.