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Unformatted text preview: 2-1- CHAPTER 5 The Public SectorEconomists often use the concept of efficiencyto judge actions because an efficient use of resources implies a maximum value of output from a resource base. This is called Technical Efficiency.Economic Efficiency when one person cannot be made better off without making someone else worse offThere are 5 reasons why markets may fail, creating a role for government1.Imperfect Information2.Externalities3.Public Goods4.Lack of Competition 5.Business CyclesPoor Information:-False information-Asymmetric Information-Either the buyer or the seller has more or better information that the other -Brand names, franchises and product warranties are helpful way of dealing with information problems -Government may require full and correct disclosure (food labels)-When information s not perfect, market imperfections may result, leading to inefficiencyExternalities:-Are the costs of benefits of a transaction that are borne by someone not directly involved in the transaction -Suppliers maximize profits and consumers maximize net benefit ONLY when market process fully incorporates all the costs and benefits into decisions...
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- Spring '07