Introduction to Economics

Transcription

1 Introduction to Economics ECONOMICS Chapter 7 Markets and Government

2 contents Roles Markets Play Efficient Allocation of Resources Roles Government Plays Public Goods Problems of Environment Welfare State

3 7.1 Roles Markets Play market market economy system - one of the most important institutions that have been ever made from the viewpoint of efficiency, no other system is superior to market economy system but market economy system has its own limits - no guarantee of equitable distribution - sometimes instability in employment and price - it could have some problem in terms of efficiency - to make up for these limits, government may intervene mixed economy system

4 7.1 Roles Markets Play mixed economy problems in a mixed economy how to divide the roles between markets and government? how to coordinate the roles of markets and government? even though markets are not perfect, we cannot say government should intervene sometimes government intervention could make the situation worse

5 7.1 Roles Markets Play Are Markets Omnipotent? M. Sandel, What Money Can t Buy? - asks whether it is desirable that the logics of the market is applied to everything some examples (1) express tickets of amusement parks (2) substitution of military service (3) room upgrades at prisons

6 7.2 Efficient Allocation of Resources Pareto efficiency strictly speaking, efficiency in economics means Pareto efficiency - cannot make someone better-off without making others worse-off by reallocation of resources Pareto efficient - suppose there are two persons(a, B) and 100kg of rice and 20 clothes in a certain economy - initial state of allocation : A has 70kg of rice and 5 clothes, and B has 30kg of rice and 15 clothes - suppose A wants more clothes while B wants more rice

7 7.2 Efficient Allocation of Resources Pareto efficiency reallocation : A gives 10kg of rice to B in return for 3 clothes new state of allocation after the exchange : A has 60kg of rice and 8 clothes, B has 40kg of rice and 12 clothes if both persons come to enjoy higher levels of utility through this exchange, we can say that the initial state of distribution was not Pareto efficient if any kind of reallocation from this state cannot make both A and B better-off, this state is Pareto efficient

8 7.2 Efficient Allocation of Resources efficient allocation of resources perfectly competitive markets allocate resources efficiently because the conditions for efficient resource allocation are automatically satisfied in perfectly competitive markets this is what A. Smith called invisible hand of the market but, in some case, resource allocation could be inefficient even in the presence of perfect competition market failure

9 7.2 Efficient Allocation of Resources Market Failure if market failure occurs, resource allocation in the market economy will be inefficient causes of market failure (1) imperfect competition - efficiency of the market economy presupposes perfect competition (2) public goods - non-rivalry in consumption and non-excludability - due to these two characteristics, people try to free ride when it comes to public goods free-rider problem

10 7.2 Efficient Allocation of Resources 시장의 Market 실패 Failure 원인 (3) externalities a certain action causes incidental benefits or damages to others, and no corresponding compensation is provided or paid externality negative externality ex) environmental pollution positive externality ex) education and research of basic science problem : too much negative externality and too little positive externality

11 7.3 Roles Government Plays should government intervene in the presence of market failure? - if market failure occurs, government intervention might be necessary - but government intervention is not automatically justified government intervention itself can be the cause of inefficiency in some cases, government failure can occur - government intervention makes the situation worse government failure

12 7.3 Roles Government Plays Causes of Government Failure (1) incomplete knowledge and information - due to incomplete knowledge and information, it is difficult to foresee the consequences of a certain policy (2) difficult to control the actions of the private sector (3) constraints in the political process - a good policy can turn into a bad one in the negotiation processes of politicians (4) problems of bureaucracy - moral hazard of bureaucrats can occur

13 7.3 Roles Government Plays Means of Government Intervention (1) direct action - production and supply of specific commodities public goods ex) national defense service, police service, roads, parks merit goods - not a kind of public goods - government thinks it desirable that all the people consume a certain commodity equally and sufficiently ex) compulsory education, housing service, health care service

14 7.3 Roles Government Plays Means of Government Intervention (2) provision of incentives - tax or financial incentives to promote investment - high taxes on gasoline or diesel oil to reduce their consumption - has the characteristic that market mechanism is utilized can avoid the problem of inefficient resource allocation caused by direct government intervention but no guarantee that the private sector responds to the given incentives as expected

15 7.3 Roles Government Plays Means of Government Intervention (3) regulation of the private sector - regulation for the purposes of income redistribution, protection of consumers, environmental protection, fair trade - problems of regulation basically inflexible and arbitrary actual consequences of regulation could be different from what was expected gains could go to special interest groups capture theory of regulation makes rent seeking activities more rampant

16 7.3 Roles Government Plays Measures to Cure Government Failure institutional reforms - inefficiency mainly comes from too much bureaucratization, unclear distribution of roles, insufficiency of check and balance provision of appropriate incentives - inflexibility in promotion and pay is the main cause of laziness introduction of competition - lack of effective competition leads to the inefficiency of the government sector

17 7.4 Public Goods free-rider problem - people want to consume public goods, but are reluctant to share the cost of producing them - closely related to non-excludability of public goods - if markets assume the task of providing public goods markets, the level of actual provision will be far lower than socially optimal level Question: Do people actually try to free-ride in connection with public goods? - according to the results of experiments by behavioral economists, people do not necessarily free-ride in actuality

18 7.4 Public Goods one more difficulty related to public goods is the difficulty in figuring out the appropriate level of production - the appropriate level of production of public goods depend on the preferences of people - but people may act strategically and do not reveal true preferences in order to reduce their tax burdens - to figure out the appropriate level of public goods, it is necessary to induce people to reveal their true preferences for public goods

19 7.5 Problems of Environment problems of environment can be understood basically in the framework of The Tragedy of the Commons - commons used by all people tend to be overused and become wasteland sooner or later unclear definition of ownership is the crux of the matter economic development and environment - the problems of environmental pollution existed even before the time of industrial revolution - water and air pollution in the Roman empire (B.C. 1c) - true that the problem became much more serious with industrialization - zero growth?

20 7.5 Problems of Environment Solution of Environmental Problem Why is it difficult to solve the problem of environment? - environmental problems are closely related to externalities market failure inevitable - environmental problems tend to get serious to a dangerous level all of a sudden ex) The Great Smog that broke out in London in October conflicts of interest among various groups make it difficult to find rational solutions

21 7.5 Problems of Environment Solution of Environmental Problem government intervention (1) command-and-control direct control of the amount of effluents, mandatory cleaning facilities, mandatory adoption of clean technology (2) market based approach effluent charge or emission rights system induces the private sector to clean up voluntarily through price incentives - policies of environmental protection in Korea are basically command-and-control

22 7.5 Problems of Environment Solution of Environmental Problem Coase theorem argues that government intervention in the presence of externalities is undesirable - he says that reciprocity is an essential feature of externalities - government intervention could lead to a worse outcome - a better solution can be found by voluntary negotiations of interested parties - Coase theorem presupposes that transaction cost is nor large - not a practical solution in actuality

23 7.6 Welfare State government plays a central role in the efforts to improve people s economic and social welfare welfare state in modern societies, the model of welfare state is closely related with liberalism those who presented the model of welfare state in the early stages, however, were conservative politicians the first example of welfare state could be found in Prussia (O. von Bismarck) welfare state in the modern sense first appeared in Britain in 1948

24 7.6 Welfare State Core Programs of Welfare State contents of welfare state differ from country to country, but basically consist of the following three core programs (1) reduction in distributional inequality with the expectation such a decrease will improve social welfare (2) reduction in economic instability by various social insurance programs (3) anti-poverty measures : poverty is the most serious threat to social welfare, but its total eradication is a difficult task

25 7.6 Welfare State Controversy over Welfare State welfare state tries to improve the state of social welfare through redistribution, but persons with conservative belief argue that government s redistribution efforts cannot be justified on ethical grounds ex) R. Nozick, M. Friedman some argues that too much social welfare dampens the vitality of economy too much tax burden could also be a problem but too little social welfare leads to inequitable state of distribution, and this would also be an important reason for dampening the vitality of economy

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