Why Does Government Intervene

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Why Does Government Intervene?

• PSC 314Dr. Joseph StefkoUniv at Buffalo,
  SUNYSpring 2006

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Midterm Exam

• In 2 weeks (March 6th)
• Covers lectures readings
• Basics of policy process
• Structuring problems and the agenda
• Players in the process
• Making policy
• Government intervention
• Implementation
• Multiple-choice

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Getting to Implementation

• How policy gets made
• What factors impact the process
• Why the process happens at all
• But this takes a major aspect of the policy
• process for granted
• Government Involvement

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Hobbes View

• What is life like without government?
• Why?
• Self-interest guides us
• What role should government serve?

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The Leviathan

• How does govt acquire power, authority?
• Sacrificing some freedoms
• Rules governing society
• Stability, consistency, livability
• Keep human nature in check

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Why does govt exist?

• Government exists for a number of reasons
• Establish rules
• Guarantee certain rights, freedoms
• Mechanism of collective action(defined)
• Making public policy to solve problems

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Why does govt exist?

• We allow government a role in society
• We permit government to intervene
• Why does govt get involved in public policy
  issues?
• Ensure efficient use of resources
• Promote fair/equitable use of resources(what
  about outcomes?)

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Efficiency v. Equity

• Efficiency
• Basic supply and demand
• Markets most efficient at equilibrium
• No waste at equilibrium(whatever is produced is
  consumedonly what is consumed gets produced)

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Efficiency v. Equity

• Equity
• Fairness for all actors in the system
• Allocation situation
• Where actors receive proportionate amounts(not
  necessarily equality)

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Efficiency v. Equity

• What should be the most important factor in
  deciding how government acts?

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Collective Choice

• Rational choice by individuals vs.Rational
  choice by society
• Diverging goals and interests
• Mutual gain

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Coercion

• Logic of collective action
• Resolving the paradox of government
• Govts role in societyPermitting stability in
  the face of human nature, and diverging goals and
  interests
• The vehicle is public policy

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Pareto Efficiency

• Definition
• Making markets Pareto efficient
• Based on origins of human nature in economic
  transactions
• Difference from normal efficiency

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Public v. Private Goods

• Govts role in perfect worldEnsure Pareto
  efficiency
• Private goods
• Rivalrous
• Excludable
• Divisible
• Examples

• Public goods
• Non Rivalrous
• Non Excludable
• Non Divisible
• Examples

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Market Efficiency

• Markets can only be efficiency with private goods
• Public goods are entirely different types of
  markets
• This is the number one reason for government
  intervention(aka Market Failures)

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Market Failures

• Market that produces inefficient outcome
• A necessary private good not being provided
  efficiently, for example
• Other market failures

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Market Failures

• Public goods
• Most common explanation for government
• Something private sector cant do on its own
• Meet the conditions of non-rivalrous,
  non-excludable, non-divisible
• Other examples?
• Govt may step in to provide the good/service

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Market Failures

• Externalities
• Impact on a third-party from some transaction
  between two others
• Positive (examples)
• Negative (examples)
• Govt may step in to mitigate the impact

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Market Failures

• Imperfect competition
• Monopolies
• Dominance of the market by one player
• Govt may step in to regulate influence

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Market Failures

• Inadequate information(aka information
  asymmetry)
• Info not balanced across producers, consumers
• Examples
• Govt may step in to increase disclosure of info

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Market Failures

• Time lags
• Transfer of debt/obligation across generations
• Debt impacts those not responsible for it
• Govt may step in to regulate impacts

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Market Failures

• High transaction costs
• Costs involved in carrying out econ transactions
• Obtaining/evaluating info
• Establishing bargaining position
• Locating bargaining partners
• Negotiating contracts
• Monitoring/enforcing contracts
• Govt may step in to encourage transactions

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The Role of Government

• Economy is meeting ground
• Why government?
• Establish rules of the game
• Govern the market
• Set boundaries
• How does govt establish rules of the game?
• Resources are scarce

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Inequities

• Another type of market failure
• Distributional sources of market failure
• Three major types
• Wrong patterns of consumption
• Inadequate opportunity
• Inappropriate distribution

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Wrong Patterns of Consumption

• Govt encourages desirable behaviors discourages
  undesirable ones
• Examples

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Inadequate Opportunity

• Certain groups deprived of opportunity to enter
  markets
• Encourages illicit attempts to enter markets
• Govt tries to make illegal markets less
  attractive encourage participation in legal
  markets

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Inappropriate Distribution

• Rich vs. Poor
• Measured differently than opportunity
• Opportunity is the frameworkDistribution is the
  result
• Should we focus on equality at both ends of the
  process?

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Conclusion

• Markets are not always efficient, equitable
• They can produce too much, too little, not
  provide sufficient opportunities, or completely
  disenfranchise certain groups
• Govt acts to set the parameters of markets
• Laws, contract law and regulatory actions