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CH16-MARKET-FAILURES-GOVT-INTERVENTION.docx - Econ 101...

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Econ 101Chapter 16: Market Failures and Government InterventionFree markets allow decentralized decision making rather than all economic decision made by govCase for gov intervention, no one wants to let markets decide everything about economic affairsOperative choice is not between unhampered free market economy and fully centralized commandeconomy. Rather choice of which mix markets and government intervention best suite peoples hopesand needs16.1 Basic Functions of GovernmentMonopoly of violence: violent act conducted by military or police of government, through justice system,gov incarcerate people, dangerous monopoly that can be abusedWhen government’s monopoly of violence is secure and functions with effective restrictions against itsarbitrary use, citizens can safely carry out ordinary economic and social activitiesADAM SMITH: duty of gov to protect society from invasion, and protect members of it’s societyGovernment activity to provide security of property, enforce property rights give people secure claimPolicy makers in developed countries now understand challenges in developing countries becauseofineffective political structuresoInstitution Building:Aid taking form of political rather than economic assistance16.2 The Case for Free MarketsSecure framework of law and order, well defined property rights, economy function well without govinterventionFree markets, consumers’ preferences and producers’ cost generate price signals, pursuing self interest,allocate resources without conscious central directionDistribution of income by price of factors of production, income for ownersFirms compete to get ahead by producing better goods cheaply, tech changes that raise living standardsFormal Defence:concept based on allocative efficiency, all markets were perfect comp, gov allowed allprices determined by D and S, then P = MC for all products and economy = AEAllocative Efficiency:resources used in way that total surplus maximizedInformal Defence:market economies that whether or not are perfect comp, 3 argumentsoFree markets provide automatic coordination of action of decentralized decision makersoPursuit of profits in free markets provides stimulus to innovation and rising living standardsoFree markets permit decentralization of economic powerAutomatic CoordinationDefender of free markets, decentralized market more flexible, adjust more quickly to changeAs condition change, p in market also change, decentralized decision makers react continuallyGov quotas, allocations, rationing schemes more difficult to adjustFree market has automatic signals as situation changesNot all changes are anticipated, million of responses, can’y anticipate them all“Market system allows for coordination without anyone needing to understand how who system works”Innovation and Growth
Cars, jets, invented by individuals or firms in pursuit of profitsIndividuals risk time and money in hope of earning profits

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Public Good, Market failure, Externality

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