Ch14 - Chapter 14 Regulation and Antitrust Law I The...

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C h a p t e r   1 4 :   R e g u l a t i o n   a n d   A n t i t r u s t   L a w I. The Economic Theory of Government A. The economic theory of government explains the economic roles of governments, the economic choices that they make, and the consequences of those choices. 1. Governments exist for two reasons: a) First, they establish and maintain property rights , the foundation of which all market activity takes place. b) Second, they provide mechanisms for allocating scarce resources when the market economy results in inefficiency—a situation called market failure . 2. In the case of market failure, choices made by consumers or producers are made in self-interest, but these choices fail to align with the social interest. a) Market failure presents the government with an opportunity to correct the inefficient allocation of resources. b) Economic analysis can reveal whether these social choices are efficient or inefficient. B. There are five instances of economic problems that create the potential for government regulation to increase efficiency: 1. Decisions made by firms operating in a monopoly or oligopoly prevent resources from being allocated efficiently. a) Regulation and antitrust laws are designed to cope with these problems. 2. A lack of property rights creates externalities in the form of external costs and external benefits. a) Externalities are created when production or consumption costs are borne by people not involved with the production or consumption of the good. b) The market fails to motivate producers and consumers of goods that generate externalities to take into account the opportunity cost of their choices on society. c) The producers create too much of the good and the allocation of resources in this market is inefficient. 3. Private market provision of public goods creates a free-rider problem because once the good is provided, everyone can enjoy consuming it without having to pay for it. a) Producers are unable to make consumers pay for their level of consumption and so they under-produce the good. b) The market process does not motivate these producers to provide sufficient quantities of the good for an efficient allocation. 4. A lack of defined property rights makes people’s consumption of common resources inefficient. a) Common resources are resources that are not owned by anyone and yet are used by everyone. b) The market fails to make consumers reflect the opportunity cost of consumption in their choices. c) People consume too much of the common resource and the market allocation is not efficient. 5. Besides regulating economic behavior of producers and consumers, the government can also reallocate resources to address concerns about equity. a) The government can tax some people and distribute the revenues to others.
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C. A government operating within a democratic society can be described and analyzed as a complex organization making resource allocation decisions in a political marketplace.
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