1、LaugheQ.How many economists does it take to screw in a light bulb?A.Eight.One to screw it in and seven to hold everything else constant.IntrodvShould the government intervene in the market?The framework presented might be called the invisible hand framework.Invisible hand framework perfectly competi
2、tive lead individuals to make voluntary choices that are in societys interest.Market FvA market failure occurs when the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes.Market FvAny time a market failure exists,there is a reason for possible go
3、vernment intervention into markets to improve the outcome.Market FvBecause the politics of implementing the solution often leads to further problems,government intervention may not necessarily improve the situation.ExternvExternalities are the effect of a decision on a third party that is not taken
4、into account by the decision-maker.vExternalities can be both positive and negative.ExternvNegative externalities occur when the effect of a decision on others that is not taken into account by the decision-maker is detrimental to the third party.uExamples include second-hand smoke,water pollution,a
5、nd congestion.ExternvPositive externalities occur when the effect of a decision on others that is not taken into account by the decision-maker is beneficial to others.uExamples include innovation,education,and new business formation.Negative ExvWhen negative externalities ensue third parties are hur
6、t.vMarginal social cost is greater than marginal private cost.Negative ExvMarginal social cost includes all the marginal costs borne by society.Negative ExvMarginal social cost is calculated by adding the negative externalities associated with production to the marginal private costs of that product
7、ion.The Effect of a NegalityMarginal social benefit Marginal private cost Marginal social costCostQuantity0Q0P0Q1P1Marginal cost from externalityPositive ExvPrivate trades can benefit third parties not involved in the trade.vMarginal social benefit equals the marginal private benefit of consuming a
8、good or service plus the positive externalities resulting from consuming that good or service.A Positive ECostQuantity0Marginal benefit of an externalityD0=Marginal private benefitD1=Marginal social benefitQ0P0Q1P1S=Marginal private and social costAlternative Methods of DexternalitiesvExternalities
9、can be dealt with via direct regulation,incentive policies,and voluntary solutions.Direct RevA program of direct regulation is where the amount of a good people are allowed to use is directly limited by the government.Direct RevEconomists do not like this solution since it does not achieve the desir
10、ed end as efficiently(at the lowest cost possible in total resources without consideration as to who pays those costs)and fairly as possible.Direct RevDirect regulation is inefficient because it achieves a goal in a more costly manner than necessary.IncentivvIncentive programs are more efficient tha
11、n direct regulatory policies.vThe two types of incentive policies are either taxes or market incentives.Tax IncentivA tax incentive program uses a tax to create incentives for individuals to structure their activities in a way that is consistent with the desired ends.vOften the tax yields the desire
12、d end more efficiently than straight regulation.Tax IncentivThis solution embodies a measure of fairness about it the person who conserves the most pays the least tax.Tax IncentivAnother way to handle a negative externality is through a pollution tax or effluent fees.uEffluent fees charges imposed b
13、y government on the level of pollution created.Regulation ThonMarginal social benefit Marginal private cost Marginal social costCostQuantity0Q0P0Q1P1Efficient taxMarket IncensvAn alternative to direct regulation is some type of market incentive program.vMarket incentive program a plan requiring mark
14、et participants to certify total consumption their own or others has been reduced by a specified amount.Market IncensvA market incentive program is similar to the regulatory solution in that the amount of the good used is reduced.Market IncensvA market incentive program differs from a regulatory sol
15、ution in that individuals who reduce consumption by more than the required amount are given a marketable certificate that can be sold to someone else.Voluntary vVoluntary reductions leave individuals free to choose whether to follow what is socially optimal or what is privately optimal.vEconomists a
16、re dubious of voluntary solutions.Voluntary vA persons social conscience and willingness to do things for the good of society generally depend on his or her belief that others will also be helping.Voluntary vIf a socially conscious person comes to believe a large number of other people will not cont
17、ribute,he or she will often lose their social conscience.uThis is another example of a free rider problem individuals unwillingness to share in the cost of a public good.The OptimvAn optimal policy is one in which the marginal cost of undertaking the policy equals the marginal benefit of that policy
18、.The OptimvShould pollution be totally eliminated?uSome environmentalists say“yes.”uEconomists would answer that doing so is costly so marginal costs should be balanced against marginal benefits.The OptimvThe point where MC=MR is called the optimal level of pollution.uOptimal level of pollution the
19、amount of pollution at which the marginal benefit of reducing pollution equals the marginal cost.PublivA public good is one that is nonexclusive(no one can be excluded from its benefits)and nonrival(consumption by one does not preclude consumption by others.PublivThere are no pure examples of a publ
20、ic good.lThe closest example is national defense.uTechnology can change the public nature of goods.lRoads are an example.PublivOnce a pure public good is supplied to one individual,it is simultaneously supplied to all.uA private good is only supplied to the individual who bought it.PublivWith public
21、 goods,the focus is on groups.uWith private goods,the focus is on the individual.PublivIn the case of a public good,the social benefit of a public good is the sum of the individual benefits.PublivAdding demand curves vertically is easy to do in textbooks,but not in practice.uThis is because individu
22、als do not buy public goods directly so that their demand is not revealed in their actions.The Market Valuood0.50Price123Quantity.80.60.40.201.00Market demandDBDA0.100.400.100.600.50InformatiovPerfectly competitive markets assume perfect information.vReal-world markets often involve deception,cheati
23、ng,and inaccurate information.InformatiovWhen there is a lack of information,buyers and sellers do not have equal information,markets may not work properly.InformatiovEconomists call such market failures adverse selection problems.uAdverse selection problems problems that occur when a buyer or a sel
24、ler have different amounts of information about the good for sale.Policies to Deal with Il ProblemsvOne policy alternative to deal with information market failures is to regulate the market and see that individuals provide the correct information.Policies to Deal with Il ProblemsvAnother alternative
25、 is for the government to license individuals in the market and require them to provide full information about the good being sold.Policies to Deal with Il ProblemsvRegulatory solutions may be overly slow or costly.A Market in IvA market in information is one solution to the information problem.vInf
26、ormation is valuable,and is an economic product in its own right.A Market in IvLeft on their own,markets will develop to provide information that people need and are willing to pay for it.A Market in IvEconomists who do not like government interference point out that informational problems are not a
27、 problem of the market;it is a problem of government regulation.LicensinvLicensing of doctors is a debate that is motivated by information problems.vCurrently all doctors practicing medicine are required to be licensed this was not always so.vLicensing of doctors is justified by informational proble
28、ms.LicensinvSome economists argue that licensing is as much a problem of restricting supply as it is to help the consumer.LicensinvWhy,if licensed medical training is so great,do we even need formal restrictions to keep other types of medicine from being practiced?LicensinvWhom do these restrictions
29、 benefit:the general public or the doctors who practice mainstream medicine?uWhat have the long-term effects of licensure been?An Informational AlticensurevAs an alternative,the government could provide the public with information about which treatments work and which do not.This would give rise to
30、consumer sovereignty the right of the individual to make choices about what is consumed and produced.An Informational AlticensurevIn this scenario,the government would provide such information as:lGrades in college.lGrades in medical school.lSuccess rate for various procedures.lReferences.lMedical p
31、hilosophy.lCharges and fees.An Informational AlticensurevThis information alternative would provide much more useful information to the public than the present licensing procedure.An Informational AlticensurevHere are some words of caution about the informational alternative.lTo get a true picture o
32、f whether the present system is best would require experts on real-life practices and institutions.lThe problem is that the experts may have a vested interest in keeping things just the way they are.Government FailureailuresvMarket failures should not automatically call for government intervention.v
33、Why?Because governments fail too.Government FailureailuresvGovernment failure occurs when the government intervention in the market to improve the market failure actually makes the situation worse.Reasons for GoveuresvGovernments do not have an incentive to correct the problem.vGovernments do not ha
34、ve the information to deal with the problem.vIntervention in the markets is almost always more complicated than it initially looks.Reasons for GoveuresvGovernment intervention does not allow fine-tuning,and so,when the problems change,the government solution often responds far more slowly.uGovernment intervention leads to more government intervention.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin
