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Unformatted text preview: Rationales for CBA Three main rationales for CBA 1. Redistribution 2. Market failure 3. Government failure Rationale 1: Redistribution Pareto e ciency does not identify a unique allocation of resources Di erent e cient allocations correspond to di erent distributions of wealth The particular allocation that arises in a perfectly competitive market is a function of the initial distribution of wealth A society may collectively decide (e.g., through voting) that some e cient allocations are better than others in terms of distribution, and so support policy intervention to achieve a fairer outcome Two ways of doing this abandon the market mechanism entirely and let the government directly determine resource allocations (central planning) intervene with wealth redistribution policies (direct or indirect) and allow the market to achieve a fairer outcome Policies aimed at redistributing wealth inevitably reduce incentives to create wealth Example: income taxation and the distortion of the work-leisure choice So there is typically a con ict between e ciency and equity; ie, between e ciency and a more equal ( fairer ) distribution of wealth In trying to distribute wealth more evenly, the total amount of wealth available is often reduced because of adverse e ects on incentives to create wealth (ie, redistribution is not costless) So an important role for CBA is to identify least-cost policies to redistribute wealth; ie, policies that achieve given distributive goals with minimum adverse impact on the creation of wealth Econ 370 Lecture 3: page 1 Rationale 2: Market Failure Market failure is said to occur when a market produces an ine cient allocation of resources Important sources of market failure include 1. Market power (eg, monopoly) 2. Externalities 3. Open access resources (a special type of externality) 4. Public goods 5. Asymmetric information5....
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- Summer '10
- Market failure, DWL