CV 2014 July 17

microeconomics puzzle pieces - consumer theory - production theory - three types of market failure (imperfect competition, externalities, public goods) - etc keypoint government rules and regulations have as much or more to do with the bottom line profits of most companies than any competitor's actions other reasons for government regulation political or ethical problem with how wealth and income are distributed triggers government intervention into the free market to see this assume economy is functioning with complete efficiency on the PPF even if market systems work perfectly it might still lead to a flawed outcome why this could happen incomes are determined by a wide variety of factors including effort, education, inheritance, factor prices, and luck resulting income distribution may not correspond to a fair outcome a rick man's cat may drink the milk that a poor boy needs to remain healthy is the market failing? not at all the market mechanism is doing its job - putting goods in the hands of those who have the dollar votes if a country spends more fertilizing its lawns than feeding poor children, that is a defect of income distribution, not of the market indeed even the most efficient market system may generate great inequality changing the distribution of income 1. progressive taxation taxing large incomes at a higher rate than small incomes impose heavy taxes on large inheritances to break the chain of privilege 2. transfer payments aid for the disabled unemployment insurance low cost housing subsidies provides a safety net to protect the unfortunate from privation paid for from taxes levied on the more privileged normative questions economics cannot answer normative or prescriptive questions about how much of market incomes, if any, should be transferred to poor families this is a political question that can be answered only at the ballot box, or in some countries, at the point of a gun failure of market economy government intervention current examples of government policy 1. inefficiency 1.1 monopoly, externalities - encourage competition, intervene in markets - antitrust laws, deregulation - antipollution laws, antismoking ordinances 1.2 public goods - encourage beneficial activities - build lighthouses, subsidize scientific research 2. inequality 2.1 unacceptable inequalities of income and wealth - redistribute income - progressive taxation of income and wealth - income-support programs - food stamps 3. macroeconomic problems 3.1 business cycles (high inflation and unemployment) - stabilize through macroeconomic policies - monetary policies, fiscal policies 3.2 slow economic growth - stimulate growth - invest in education - raise national savings rate by reducing budget deficit