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When Should Government Intervene?: - PowerPoint PPT Presentation

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

negative externality
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
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