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MARKET FAILURE

MARKET FAILURE. Markets work well when there is competition and proper incentives Low Prices Considerable Variety Good Service Timely Innovation When markets fail, government may need to intervene. The Role of Government. Actor Collects taxes Buys goods and services

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MARKET FAILURE

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  1. MARKET FAILURE • Markets work well when there is competition and proper incentives • Low Prices • Considerable Variety • Good Service • Timely Innovation • When markets fail, government may need to intervene

  2. The Role of Government • Actor • Collects taxes • Buys goods and services • Produces goods and services • Referee • Sets the rules • Impartial judge of rule violations • Imposes penalties for violations • When should government be involved?

  3. Promote Competition • Large firms may be more efficient • e.g., Electric power • Large firms may be able to exclude or weaken competitors • e.g., Microsoft • Lack of competition can cause high prices and other problems

  4. Promote Competition • Government remedies • Antitrust Laws • Price regulation

  5. Correct for Negative Externalities • Some activities impose costs on other than the buyer • e.g., Pollution • Polluters don’t have to consider the costs they impose on others

  6. Correct for Negative Externalities • Markets don’t provide an incentive to avoid polluting • Government needs to intervene • Environmental regulations • Pollution taxes

  7. Correct for Positive Externalities • Markets may under-provide some goods and services • Education • Benefits the student • Benefits society • Government provides education at less that its full cost • Free education for K-12 • Subsidized higher education

  8. Ensure Economic Stability • Low unemployment • Low inflation • Adequate growth • Provide an economic safety net (?) MORE LATER

  9. Provide Public Goods • Sometimes, people receive benefits without paying • e.g., A national defense system protects everyone • There is no incentive to pay for national defense • Public Goods: People can’t be excluded from the benefits

  10. Provide Public Goods • Public goods are not well-provided by markets • Government could intervene and use its taxing powers

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