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    Market Failure and Government Intervention

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    Mohamed Fathy
    The document discusses several reasons for government intervention in markets including externalities, public goods, and common resources. It provides examples and solutions for dealing with each of these market failures. Specifically, it discusses how externalities like pollution can be addressed through regulations, taxes and subsidies, or tradable pollution permits. It also explains how public goods that are non-excludable and non-depletable require government provision. Finally, it notes common resources require regulation to prevent overuse problems like the tragedy of the commons.

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    Market Failure and Government Intervention

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    Mohamed Fathy
    195 views19 pages
    The document discusses several reasons for government intervention in markets including externalities, public goods, and common resources. It provides examples and solutions for dealing with each of these market failures. Specifically, it discusses how externalities like pollution can be addressed through regulations, taxes and subsidies, or tradable pollution permits. It also explains how public goods that are non-excludable and non-depletable require government provision. Finally, it notes common resources require regulation to prevent overuse problems like the tragedy of the commons.

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    The document discusses several reasons for government intervention in markets including externalities, public goods, and common resources. It provides examples and solutions for dealing with each of these market failures. Specifically, it discusses how externalities like pollution can be addressed through regulations, taxes and subsidies, or tradable pollution permits. It also explains how public goods that are non-excludable and non-depletable require government provision. Finally, it notes common resources require regulation to prevent overuse problems like the tragedy of the commons.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    195 views19 pages

    Market Failure and Government Intervention

    Uploaded by

    Mohamed Fathy
    The document discusses several reasons for government intervention in markets including externalities, public goods, and common resources. It provides examples and solutions for dealing with each of these market failures. Specifically, it discusses how externalities like pollution can be addressed through regulations, taxes and subsidies, or tradable pollution permits. It also explains how public goods that are non-excludable and non-depletable require government provision. Finally, it notes common resources require regulation to prevent overuse problems like the tragedy of the commons.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 19
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    The document discusses market failures such as externalities, public goods, and common resources that can justify government intervention in markets. It also covers potential solutions like regulation, taxes/subsidies, and turning public goods into private goods.

    Reasons for government intervention discussed include externalities, public goods, and common resources, which can lead to inefficient market outcomes without intervention.

    The three main reasons for market failures discussed are externalities, public goods, and common resources.

    Externalities Public Goods Common Resources Interventions in Health

    Market Failure and Government Intervention


    Angela Fertig

    Spring 2009

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Why intervene?

    Economists generally believe in the invisible hand: the market and competition are the best ways to allocate resources. In fact, redistributing income can be very bad for the economy. Okuns Leaky Bucket taxing the rich reduces their incentive to be productive, creative giving money to poor reduces their incentive to work redistributing slices of the pie shrink the pie or are like a leaky bucket

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Why intervene?

    However, there are reasons for govt intervention. We wont discuss monopoly power today, but other important reasons include: Externalities Public goods Common resources

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Externalities

    Defn: an externality is the uncompensated impact of one persons actions on the well-being of a bystander Positive (research) or Negative (pollution, contagious disease)

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Graphing externalities
    negative positive

    Production

    Consumption

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Solution 1

    Coase Theorem: if private parties can bargain without cost, they can solve the problem of externalities on their own doesnt usually work b/c: there are transaction costs parties cant agree there are many parties to organize

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Solution 2

    Govt Regulation: quotas, specic rules, etc. isnt perfect b/c: requires a lot of knowledge about the industry inexible (when times change, need new rules) doesnt encourage ecient allocation of pollution reduction (it is cheaper for some to abate than others) doesnt encourage abatement beyond regulation

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Solution 3

    Taxes and Subsidies: encourages more abatement than regulation encourages ecient allocation of abatement but govt has to choose right tax rate Note: On the next page is proof that there are eciency gains to this kind of tax. I assume that all tax revenue goes to the bystanders.

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Welfare gain from Tax on Negative Externality graph

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Welfare gain from Tax on Negative Externality

    CS PS Bystanders TS

    Before Tax A+B+C+D F+G+H+I -B-C-F-G -D-E1-H-E2 A+I-E1-E2

    After Tax A I A+I

    Change -B-C-D -F-G-H +B+C+F+G +D+E1+E2+H +E1+E2

    Dwt Loss of Eqbm: (social cost > value) E Cs and Ps proted at the expense of the bystanders CS down, PS down, TS up e.g. sin taxes taxes on alcohol, tobacco, gasoline

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Solution 4

    Tradable Pollution Permits: Govt decides amount of total pollution allowable. Passes out pollution permits summing up to limit. Firms can trade permits. Firm A, with low abatement costs, sells permit. Firm B, with high costs, buys. Using Coases Theorem. Like a tax, but dont have to know the right tax rate.

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Public Goods
    Defn: public goods are goods that anyone can use without paying (not excludable) and are not diminished by each persons use (not depletable) Defn: free riders are those who receive the benet of a good but avoid paying for it Examples: national defense, research, absence of poverty, snow removal, ood control, mosquito control, public radio, health knowledge Note: not all govt gds & services are public goods e.g. education is not a public good (excludable and depletable). The govt provides it because it has positive externalities.

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Solution

    do cost-benet analysis if benets outweigh cost, govt should collect taxes and provide the good

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Common Resources

    Defn: common resources are goods that anyone can use without paying (not excludable) and are diminished by each persons use (depletable) Tragedy of the Commons: As pop of people and sheep grows, grazing land is destroyed. If there had been coordination, they could have maintained the land. Examples: sh in the ocean, environment, oil in the ground

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Solution

    regulate tax turn into private goods

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Interventions in Health

    Taxes and subsidies health insurance, sin taxes Public Provision support of public hospitals, VA hospitals Transfer programs:
    Medicaid health care for poor Medicare health care for aged

    Regulation FDA, OSHA, mandated benets Research NIH, NSF Public Health Initiatives Healthy People 2010

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Competitive Strategies as Interventions


    Health savings accounts individual (+employers) put money in tax exempt account purchase low-cost high-deductible insurance plan pay out-of-pocket for most health expenses if amount left over, rolls over to next year encourages individuals to use care sparingly, sensitive to price main problem: adverse selection, healthy people like them, sick people will drain account often, choose more expensive insurance plans raising premiums (due to higher risk pool)

    Angela Fertig

    Market Failure and Government Intervention

    Externalities Public Goods Common Resources Interventions in Health

    Competitive Strategies as Interventions

    Prescription drug benet plan govt subsidizes private insurers to oer seniors drug plans govt cannot negotiate lower prices for drugs, insurers must do it (controversial keeps innovation going, lets market do work, no info required of govt, good for pharm industry)

    Angela Fertig

    Market Failure and Government Intervention

    ESCRIPTION DRUG BENEFIT


    Doughnut hole
    March 2009
    Standard Medicare Prescription Drug Benefit, 2009
    Enrollee Pays 5%
    Plan Pays 15%; Medicare Pays 80% $6,154 in Total Drug Costs
    Figure 2

    Externalities Public Goods Common Resources Interventions in Health

    hed a e on 6. All s to the by the e

    ($4,350 out of pocket)

    ficiaries istance

    Enrollee Pays 100%

    $3,454 Coverage Gap (Doughnut Hole)

    ption drug benefits s the 7% ies in s and

    Enrollee Pays 25%

    ($896 out of pocket)

    $2,700 in Total Drug Costs

    Plan Pays 75%

    $295 Deductible

    $364 Average Annual Premium


    NOTE: Annual premium amount based on $30.36 national average monthly beneficiary premium (CMS, August 2008). Amounts for premium, coverage gap, and catastrophic coverage threshold rounded to nearest dollar. SOURCE: Kaiser Family Foundation illustration of standard Medicare drug benefit for 2009 (standard benefit parameter update from Centers for Medicare & Medicaid Services April 2008).

    Angela Fertig

    Market Failure and Government Intervention

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