Occurs when the free market mechanism fails to allocate resources efficiently.
Often arises due to public goods, merit goods, demerit goods, or information failure.
Government Intervention:
Public Goods: Governments provide public goods that the private sector would not supply due to the free-rider problem.
Merit Goods: Governments subsidize or directly provide merit goods to address underconsumption caused by information failure.
Demerit Goods: Governments regulate or restrict the consumption of demerit goods to protect public health and welfare.
Price Controls: Governments may impose price ceilings (maximum prices) or price floors (minimum prices) to address market inefficiencies or achieve specific policy objectives.
Key Points:
Market failures justify government intervention to improve market outcomes.
The choice of intervention depends on the specific market failure and policy objectives.
Government intervention can have both benefits and costs, and careful evaluation is necessary to assess its effectiveness.
In conclusion, understanding the reasons for government intervention in markets is crucial for analyzing economic issues and evaluating the role of government in promoting efficient resource allocation and social welfare.
Chapter 13
Indirect Taxes:
Taxes imposed on the production or consumption of goods and services.
Types: Ad valorem (percentage of price) and specific (fixed amount per unit).
Incidence: The burden of the tax shared between producers and consumers, influenced by price elasticity.
Effects: Increase prices, reduce quantity demanded, and generate government revenue.
Subsidies:
Payments made by the government to producers or consumers.
Used to encourage production or consumption of certain goods or services.
Effects: Lower prices, increase quantity supplied or demanded, and generate costs for the government.
Direct Provision of Goods and Services:
Government provision of goods and services that are not efficiently supplied by the private sector.
Examples: Public goods, merit goods, essential services.
Considerations: Efficiency, equity, and cost.
Price Controls:
Maximum prices (price ceilings): Limit the price a seller can charge.
Minimum prices (price floors): Set a minimum price for a good or service.
Effects: Can lead to shortages or surpluses, depending on the relative prices.
Buffer Stock Schemes:
Government intervention to stabilize prices of agricultural commodities.
Involve buying and selling stocks to maintain prices within a target range.
Information Provision:
Government dissemination of information to consumers or producers to improve market efficiency and address information failures.
Key Points:
Government intervention can be used to address market failures and achieve specific policy objectives.
The choice of intervention method depends on the nature of the market failure and the desired outcome.
Each intervention has potential benefits and costs, and careful analysis is necessary to evaluate their effectiveness.
In conclusion, understanding the various methods of government intervention and their potential impacts is crucial for analyzing economic policy and evaluating the role of government in shaping market outcomes.
Chapter 14
Income vs. Wealth:
Income is a flow concept representing earnings over a period.
Wealth is a stock concept representing accumulated assets.
Measuring Inequality:
Gini coefficient: Measures the extent of income inequality, ranging from 0 (perfect equality) to 1 (perfect inequality).
Transfer Payments: Government programs that provide financial assistance to individuals or groups.
Progressive Taxation: Tax rates increase with income, reducing income inequality.
Inheritance and Capital Taxes: Taxes on inherited wealth and capital gains.
State Provision of Goods and Services: Government provision of essential goods and services, such as healthcare and education.
Key Points:
Income and wealth inequality is a significant economic issue.
Governments implement various policies to address inequality, but their effectiveness varies.
The choice of policies depends on the specific causes of inequality and the desired level of redistribution.
In conclusion, understanding the causes and consequences of income and wealth inequality is crucial for developing effective policies to promote a more equitable distribution of resources.