Rationales for Government Intervention and Government Instruments

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Rationales for Government Intervention and
Government Instruments
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Outline

• Why government intervenes
• Market Failures
• Nonprivate goods
• Externalities
• Information failures
• Policy Instruments

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Why does government intervene?

• Political Reasons
• Moral or Ethical Reasons
• Economics and Market Failures
• When the market fails to be efficient
• Three categories
• Nonprivate or public goods
• Externalities
• Information imperfections

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Market Failures

• Nonprivate Goods

No Joint Consumption
Joint Consumption
Exclusion is Feasible
Pure Private Good
Toll Good
Exclusion is NOT Feasible
Common Pool Resource
Pure Public Good
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Market Failures

• Externalities -- when a third party is affected
  by a transaction between two people and is not
  compensated for loss (negative externality) or
  pay if he gains (positive externality).
• Examples include pollution and education.

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Negative Externality Example
This represents the supply and demand curve for
electricity Is it accurate?
S
p
D
q
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Negative Externality Example (cont)
The true costs of producing electricity needs to
take into consideration these costs to society.
This is represented by the new supply
curve (Ssocial). The government ensures that
this true supply curve is realized by imposing
regulations that, in essence, increase the cost
of production.
Ssocial
S
p1
p
D
q1
q
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Positive Externality Example
This represents the supply and demand curve for
education.
S
D
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Positive Externality Example
All of society benefits from a better educated
population. While parents may ignore this, the
government should not. So, the government
subsidizes education. This subsidy, in effect,
increases parents income so that they will demand
more education.
S
p2
D2
D
q2
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Market Failures

• Information Failures
• Information sharing becomes a problem.
• Not a problem for items you buy a lot of (food
  --able to make adjustments)
• What about large items (cars) or
• Items that are difficult to comprehend (doctors)
  or health related (drugs).

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Instruments of Policy

• Regulation
• Government Management
• Taxing and Spending
• Market Mechanisms
• Education and Information

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Policy Typologies

• Distributive Policy
• individualized grants and programs
• Redistributive Policy
• one gains from anothers loss
• Regulatory Policy
• government restriction of choice