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chapter4 - CHAPTER 4 SUPPLY AND DEMAND FOR THE PUBLIC...

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CHAPTER 4 - SUPPLY AND DEMAND FOR THE PUBLIC SECTOR "Public Choice analyzes the motives and activities of politicians, civil servants and government officials as people with personal interests that may or may not coincide with the interest of the general public they are supposed to serve." page 87. Civil servants are neither. The role of government in the economy is very large, and has grown dramatically this century. Therefore we need to understand the role of government and see how government solutions can either increase or decrease the efficiency of the market. Public Choice economics looks at public decision making using econ analysis. In this chapter, we look at 1) possible Market Failures and 2) possible Government Failures. ECONOMIC EFFICIENCY To compare public-sector policies/outcome to private-sector policies/outcomes, we need some standard of comparison. We can use the standard of Economic Efficiency, which is the idea that we want to Maximize Net Benefits, or Minimize Net Costs. All actions involve Cost and Benefits, and we want to engage in economizing or maximizing behavior. At a given level of costs, we want to get the Max benefit possible. Or given a certain level of benefits, we want to achieve it at the lowest possible cost. The Rules of Economic Efficiency are: 1. Only engage in activities where the Benefits are greater than the Costs. Increases welfare. 2. Avoid activity where the Costs outweigh the Benefits. Counterproductive results. Reduces social welfare. When Rule 1 or 2 is violated, Economic Inefficiency results. In most cases, a market economy results in economic efficiency, because market prices and market forces guide the economy to efficient outcomes. Or stated differently, in most cases government intervention would lead to economic inefficiency, compared to the market. In most cases, there would be "Government Failure" if the government intervened because the government could not improve on Market outcomes. But what about the cases where the market outcome is inefficient? In some cases,
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perhaps a government outcome can increase efficiency, or decrease inefficiency. Example: pollution. WHY MIGHT THE INVISIBLE HAND FAIL? 1. Lack of competition - Market competition: 1) prevents sellers from taking advantage of buyers, keeps prices low, sellers compete with each other. 2) prevents buyers from taking advantage of sellers, competition for buying keeps prices up. Example: what if GM, as a buyer of labor services, offered starting salaries of $12,000 for engineering graduates? Competitive pressure from other buyers, Ford, Chrysler, would prevent that from happening. Buyers compete against other buyers. Example: Bidding in auction markets. Baseball card for $400,000. House for sale. Sellers don't always like the competitive pressure of the market. Competition is good when the other guy faces it. We would all like less competition sometimes.
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