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:.
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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
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
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
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