When Should Government Intervene?:

1. When Should Government Intervene?:

2. Definitions • Politics is the authoritative allocation of values in society • Free market: the distribution of goods and services in society through voluntary exchange

3. 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)

4. 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.

5. Market failure caused by: • Lack of Competition • Lack of Information • Transaction costs • Presence of Externalities • Positive • Negative • Public Goods (positive externality)

6. 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.

7. 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

8. Lack of information: Buyers and Sellers must know the value of the good they are buying and selling. Effect: under or over productionCorrection: labeling laws; licenses of doctors, plumbers; building codes, some product standards

9. 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

10. 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