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1、Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/IrwinGovernment Policy and Market FailuresChapter 15Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-2Laugher CurveQ.How many economists does it take to screw in a light bulb?A.Eigh
2、t.One to screw it in and seven to hold everything else constant.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-3IntroductionuShould the government intervene in the market?lThe framework presented might be called the invisible hand framework.lInvisible hand fr
3、amework perfectly competitive lead individuals to make voluntary choices that are in societys interest.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-4Market FailuresuA market failure occurs when the invisible hand pushes in such a way that individual decisio
4、ns do not lead to socially desirable outcomes.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-5Market FailuresuAny time a market failure exists,there is a reason for possible government intervention into markets to improve the outcome.Copyright 2001 by The McG
5、raw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-6Market FailuresuBecause the politics of implementing the solution often leads to further problems,government intervention may not necessarily improve the situation.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGr
6、aw-Hill/Irwin15-7ExternalitiesuExternalities are the effect of a decision on a third party that is not taken into account by the decision-maker.uExternalities can be both positive and negative.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-8ExternalitiesuNega
7、tive externalities occur when the effect of a decision on others that is not taken into account by the decision-maker is detrimental to the third party.uExamples include second-hand smoke,water pollution,and congestion.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/I
8、rwin15-9ExternalitiesuPositive externalities occur when the effect of a decision on others that is not taken into account by the decision-maker is beneficial to others.uExamples include innovation,education,and new business formation.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserve
9、d.McGraw-Hill/Irwin15-10Negative ExternalitiesuWhen negative externalities ensue third parties are hurt.uMarginal social cost is greater than marginal private cost.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-11Negative ExternalitiesuMarginal social cost in
10、cludes all the marginal costs borne by society.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-12Negative ExternalitiesuMarginal social cost is calculated by adding the negative externalities associated with production to the marginal private costs of that pro
11、duction.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-13The Effect of a Negative ExternalityMarginal social benefit Marginal private cost Marginal social costCostQuantity0Q0P0Q1P1Marginal cost from externalityCopyright 2001 by The McGraw-Hill Companies,Inc.A
12、ll rights reserved.McGraw-Hill/Irwin15-14Positive ExternalitiesuPrivate trades can benefit third parties not involved in the trade.uMarginal social benefit equals the marginal private benefit of consuming a good or service plus the positive externalities resulting from consuming that good or service
13、.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-15A Positive ExternalityCostQuantity0Marginal benefit of an externalityD0=Marginal private benefitD1=Marginal social benefitQ0P0Q1P1S=Marginal private and social costCopyright 2001 by The McGraw-Hill Companies,I
14、nc.All rights reserved.McGraw-Hill/Irwin15-16Alternative Methods of Dealing with ExternalitiesuExternalities can be dealt with via direct regulation,incentive policies,and voluntary solutions.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-17Direct Regulationu
15、A program of direct regulation is where the amount of a good people are allowed to use is directly limited by the government.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-18Direct RegulationuEconomists do not like this solution since it does not achieve the
16、desired end as efficiently(at the lowest cost possible in total resources without consideration as to who pays those costs)and fairly as possible.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-19Direct RegulationuDirect regulation is inefficient because it ac
17、hieves a goal in a more costly manner than necessary.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-20Incentive PoliciesuIncentive programs are more efficient than direct regulatory policies.uThe two types of incentive policies are either taxes or market ince
18、ntives.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-21Tax Incentive PoliciesuA tax incentive program uses a tax to create incentives for individuals to structure their activities in a way that is consistent with the desired ends.uOften the tax yields the de
19、sired end more efficiently than straight regulation.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-22Tax Incentive PoliciesuThis solution embodies a measure of fairness about it the person who conserves the most pays the least tax.Copyright 2001 by The McGraw
20、-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-23Tax Incentive PoliciesuAnother way to handle a negative externality is through a pollution tax or effluent fees.uEffluent fees charges imposed by government on the level of pollution created.Copyright 2001 by The McGraw-Hill Companies,Inc
21、.All rights reserved.McGraw-Hill/Irwin15-24Regulation Through TaxationMarginal social benefit Marginal private cost Marginal social costCostQuantity0Q0P0Q1P1Efficient taxCopyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-25Market Incentive PoliciesuAn alternative
22、 to direct regulation is some type of market incentive program.uMarket incentive program a plan requiring market participants to certify total consumption their own or others has been reduced by a specified amount.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin1
23、5-26Market Incentive PoliciesuA market incentive program is similar to the regulatory solution in that the amount of the good used is reduced.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-27Market Incentive PoliciesuA market incentive program differs from a
24、regulatory solution in that individuals who reduce consumption by more than the required amount are given a marketable certificate that can be sold to someone else.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-28Voluntary ReductionsuVoluntary reductions leav
25、e individuals free to choose whether to follow what is socially optimal or what is privately optimal.uEconomists are dubious of voluntary solutions.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-29Voluntary ReductionsuA persons social conscience and willingne
26、ss to do things for the good of society generally depend on his or her belief that others will also be helping.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-30Voluntary ReductionsuIf a socially conscious person comes to believe a large number of other people
27、 will not contribute,he or she will often lose their social conscience.uThis is another example of a free rider problem individuals unwillingness to share in the cost of a public good.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-31The Optimal PolicyuAn opti
28、mal policy is one in which the marginal cost of undertaking the policy equals the marginal benefit of that policy.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-32The Optimal PolicyuShould pollution be totally eliminated?uSome environmentalists say“yes.”uEcon
29、omists would answer that doing so is costly so marginal costs should be balanced against marginal benefits.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-33The Optimal PolicyuThe point where MC=MR is called the optimal level of pollution.uOptimal level of pol
30、lution the amount of pollution at which the marginal benefit of reducing pollution equals the marginal cost.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-34Public GoodsuA public good is one that is nonexclusive(no one can be excluded from its benefits)and no
31、nrival(consumption by one does not preclude consumption by others.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-35Public GoodsuThere are no pure examples of a public good.lThe closest example is national defense.uTechnology can change the public nature of go
32、ods.lRoads are an example.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-36Public GoodsuOnce a pure public good is supplied to one individual,it is simultaneously supplied to all.uA private good is only supplied to the individual who bought it.Copyright 2001
33、by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-37Public GoodsuWith public goods,the focus is on groups.uWith private goods,the focus is on the individual.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-38Public GoodsuIn the case of a
34、public good,the social benefit of a public good is the sum of the individual benefits.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-39Public GoodsuAdding demand curves vertically is easy to do in textbooks,but not in practice.uThis is because individuals do
35、not buy public goods directly so that their demand is not revealed in their actions.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-40The Market Value of a Public Good0.50Price123Quantity.80.60.40.201.00Market demandDBDA0.100.400.100.600.50Copyright 2001 by Th
36、e McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-41Informational ProblemsuPerfectly competitive markets assume perfect information.uReal-world markets often involve deception,cheating,and inaccurate information.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.Mc
37、Graw-Hill/Irwin15-42Informational ProblemsuWhen there is a lack of information,buyers and sellers do not have equal information,markets may not work properly.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-43Informational ProblemsuEconomists call such market f
38、ailures adverse selection problems.uAdverse selection problems problems that occur when a buyer or a seller have different amounts of information about the good for sale.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-44Policies to Deal with Informational Prob
39、lemsuOne policy alternative to deal with information market failures is to regulate the market and see that individuals provide the correct information.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-45Policies to Deal with Informational ProblemsuAnother alter
40、native is for the government to license individuals in the market and require them to provide full information about the good being sold.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-46Policies to Deal with Informational ProblemsuRegulatory solutions may be
41、overly slow or costly.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-47A Market in InformationuA market in information is one solution to the information problem.uInformation is valuable,and is an economic product in its own right.Copyright 2001 by The McGraw
42、-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-48A Market in InformationuLeft on their own,markets will develop to provide information that people need and are willing to pay for it.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-49A Market in Inf
43、ormationuEconomists who do not like government interference point out that informational problems are not a problem of the market;it is a problem of government regulation.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-50Licensing of DoctorsuLicensing of docto
44、rs is a debate that is motivated by information problems.uCurrently all doctors practicing medicine are required to be licensed this was not always so.uLicensing of doctors is justified by informational problems.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-
45、51Licensing of DoctorsuSome economists argue that licensing is as much a problem of restricting supply as it is to help the consumer.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-52Licensing of DoctorsuWhy,if licensed medical training is so great,do we even
46、need formal restrictions to keep other types of medicine from being practiced?Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-53Licensing of DoctorsuWhom do these restrictions benefit:the general public or the doctors who practice mainstream medicine?uWhat hav
47、e the long-term effects of licensure been?Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-54An Informational Alternative to LicensureuAs an alternative,the government could provide the public with information about which treatments work and which do not.lThis
48、would give rise to consumer sovereignty the right of the individual to make choices about what is consumed and produced.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-55An Informational Alternative to LicensureuIn this scenario,the government would provide su
49、ch information as:lGrades in college.lGrades in medical school.lSuccess rate for various procedures.lReferences.lMedical philosophy.lCharges and fees.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-56An Informational Alternative to LicensureuThis information a
50、lternative would provide much more useful information to the public than the present licensing procedure.Copyright 2001 by The McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin15-57An Informational Alternative to LicensureuHere are some words of caution about the informational alternat