Government Intervention.

Here are some examples to practise your chains of analysis and evaluation skills with regards to government policy and market failure.  Do not forget that intervention can result in government failure.

  • subsidies e.g. the bio-fuel debate or subsidies for industries affected by globalisation
  •  indirect taxes e.g. environmental taxes or taxes designed to curb demand for / consumption of de-merit goods
  • the introduction of competition into a market e.g. postal market liberalisation
  • an increase in government spending on public goods and merit goods such as flood defence schemes, free entry to museums and galleries
  • different strategies designed to reduce income and wealth inequality e.g. the national minimum wage or a rise in the top rate of income tax
  • the introduction of carbon trading as a way of reducing CO2 emissions
  • different policies designed to reduce unemployment e.g. comparing the effectiveness of investment in training with an employment subsidy for the long term unemployed
  • major infrastructural projects such as new motorways, London 2012
  • a decision to relax planning controls on new house-building

Missing markets – Public Goods.

The characteristics of pure public goods are non excludability; non rivalry in consumption; and non rejectable (The collective supply of a public good for all means that it cannot be rejected by people, a good example is a nuclear defence system or flood defence projects.

There are relatively few examples of pure public goods. Examples include flood control systems, some of the broadcasting services provided by the BBC, public water supplies, street lighting for roads and motorways, lighthouse protection for ships and also national defence services.

Quasi-Public Goods

A quasi-public good is a near-public good i.e. it has many but not all the characteristics of a public good. Quasi public goods are:

Public goods and market failure

• Pure public goods are not normally provided by the private sector because they would be unable to supply them for a profit.
• It is up to the government to decide what output of public goods is appropriate for society.
• To do this, it must estimate the social benefits from making public goods available

The Free Rider Problem

• Because public goods are non-excludable it is difficult to charge people for benefitting form a good or service once it is provided
• The free rider problem leads to under-provision of a good and thus causes market failure

The case for government intervention in the case of public goods

* The non-rival nature of consumption provides a strong case for the government rather than the market to provide and pay for public goods.

* Many public goods are provided more or less free at the point of use and then paid for out of general taxation or another general form of charge such as a licence fee.

* State provision may help to prevent the under-provision and under-consumption of public goods so that social welfare is improved.

* If the government provides public goods they may be able to do so more efficiently because of economies of scale.

* Direct provision of a public good by the government can help to overcome the free-rider problem which leads to market failure

flood defences      lighthouse       cameras        private prisons        fireworks world record         park in the sky

Winter Is Coming, and The Soviet Cupboard Is Bare – Command Economy Vs. Free Market (Round 1)

http://friedmanseconomy.wordpress.com/2012/09/26/command-economy-vs-free-market-round-1/

  • How is the basic economic problem being handled by the use of coupons? Why might this be less successful than money?
  • Does the article demonstrate the failing of the command or free market based solutions to the basic economic problem?

http://www.businessweek.com/stories/1991-11-03/winter-is-coming-and-the-soviet-cupboard-is-bare

 

In addition to the above below is a link to Mark Johnston’s econfix blog.  The post highlights the possible negative externalities that have occurred in Berlin with the change in economic systems.

water conservation

Advantages and Disadvantages – Command Economy Vs. Free Market (Round 2)

http://friedmanseconomy.wordpress.com/2012/10/01/command-economy-vs-free-market-round-2/

Advantages and Disadvantages of a free-market economy

Advantages:

  • Price Mechanism:
  • Self-Adjustment (equilibrium):
  • Human Psychological Aspect:
  • Competition:

Disadvantages:

  • Speculation & Bubble:
  • Undervaluation of Needs:
  • Monopoly & Duopoly:

Advantages and disadvantages of a Command economy:

Advantages:

  • Planned & Greater Predictability:
  • Elimination of Opportunity Cost:
  • Valuation of Services (education, health, etc.):
  • Reduction of Inequality:

Disadvantages:

  • Misallocation of Certain Resources:
  • Lacking Innovation (no choice or variety):
  • Shortages & Surplus
  • Efficiency

Do you live in a free market economic system?

Ascertaining the degree in which a country employs a free market system cannot be limited to the analysis of the amount of government spending as a percentage of National Income.  Here is a comprehensive look at what constitutes real economic freedom and a table showing the most and least free economies.  Remember that this is about positive economics and not value judgements.

http://www.heritage.org/index/ranking#