reasons for government intervention in the market
TRANSCRIPT
Reasons for
Government Intervention
in the Market
Reasons for
Government Intervention
in the Market
Markets and the Role of GovernmentMarkets and the Role of Government
• Government intervention and social objectives
• The objective of social efficiency– marginal social benefits and costs
• MSB > MSC produce (or consume) more
• MSC > MSB produce (or consume) less
– socially efficient output where MSB = MSC
• Equity– concepts of fairness
• Trade-offs between equity and efficiency
• Government intervention and social objectives
• The objective of social efficiency– marginal social benefits and costs
• MSB > MSC produce (or consume) more
• MSC > MSB produce (or consume) less
– socially efficient output where MSB = MSC
• Equity– concepts of fairness
• Trade-offs between equity and efficiency
Types of Market FailureTypes of Market Failure
• Externalities
– External costs of production MSC > MC
• Externalities
– External costs of production MSC > MC
Q1
External costs in productionExternal costs in production
O
MC = S
DP
Co
sts
and
be
nef
its
Quantity
O
MC = S
DP
MSC
Co
sts
and
be
nef
its
Quantity
External cost
Q1Q2
Social optimum
External costs in productionExternal costs in production
Types of Market FailureTypes of Market Failure
• Externalities
– External costs of production MSC > MC
– External benefits of production MSC < MC
• Externalities
– External costs of production MSC > MC
– External benefits of production MSC < MC
External benefits in productionExternal benefits in production
O
DP
MC = S
Q1
Co
sts
and
be
nef
its
Quantity
O
MSC
DP
Q1
External benefit
Co
sts
and
be
nef
its
Quantity
MC = S
Q2Social optimum
External benefits in productionExternal benefits in production
O
MC = S
DP
Q1Q2
Cos
ts a
nd b
enef
its (
£)
Quantity
MSC
External cost
(a ) External costs
O
DP
Q2Q1
Cos
ts a
nd b
enef
its (
£)
Quantity
MSCMC = S
External benefit
(b) External benefits
External costs and benefits in productionExternal costs and benefits in production
Types of Market FailureTypes of Market Failure
• Externalities
– External costs of production MSC > MC
– External benefits of production MSC < MC
– External costs of consumption MSB < MB
• Externalities
– External costs of production MSC > MC
– External benefits of production MSC < MC
– External costs of consumption MSB < MB
Q1
(MB)MU = D
External costs in consumptionExternal costs in consumption
O
DP
Co
sts
and
be
nef
its
Quantity
Q2
(MB)MU = D
O
DP
Co
sts
and
be
nef
its
Quantity
External cost
MSB
Q1
External costs in consumptionExternal costs in consumption
Social optimum
Types of Market FailureTypes of Market Failure
• Externalities
– External costs of production MSC > MC
– External benefits of production MSC < MC
– External costs of consumption MSB < MB
– External benefits of consumption MSB > MB
• Externalities
– External costs of production MSC > MC
– External benefits of production MSC < MC
– External costs of consumption MSB < MB
– External benefits of consumption MSB > MB
(MB)MU = D
O
DP
Q1
Co
sts
and
be
nef
its
Quantity
External benefits in consumptionExternal benefits in consumption
Q2
(MB)MU = D
O
DP
Q1
Co
sts
and
be
nef
its
Quantity
External benefit
MSB
External benefits in consumptionExternal benefits in consumption
Social optimum
O
MB
PP
Cos
ts a
nd b
enef
its (
£)
Car miles
MSB
External cost
O
MB
PP
Q1
Cos
ts a
nd b
enef
its (
£)
Rail miles
Q2
MSB
External benefit
(a ) External costs (b) External benefits
External costs and benefits in consumptionExternal costs and benefits in consumption
Q1Q2
Types of Market FailureTypes of Market Failure
• Public goods
– non-rivalry
– non-excludability and the free-rider problem
• Public goods
– non-rivalry
– non-excludability and the free-rider problem
Types of Market FailureTypes of Market Failure
• Market power
– lack of social efficiency
• Market power
– lack of social efficiency
MC1
Q1
MC
MRAR
A monopolist producing less than the social optimumA monopolist producing less than the social optimum
O
P1
£
Monopoly output
Q
O
P1
MC1
MC = MSC
Q1
MRAR = MSB
Q2
P2 = MSB
= MSC
£
QMonopoly output Perfectly competitive output
A monopolist producing less than the social optimumA monopolist producing less than the social optimum
Types of Market FailureTypes of Market Failure
• Market power
– lack of social efficiency
– deadweight welfare loss under monopoly
• Market power
– lack of social efficiency
– deadweight welfare loss under monopoly
O
£
Q
Ppc
Qpc
AR = D
Consumersurplus
Producersurplus
Deadweight loss under monopolyDeadweight loss under monopolyMC
(= S under perfect competition)
(a) Industry equilibrium under perfect competition(a) Industry equilibrium under perfect competition
a
MRO
£
Q
Ppc
Qpc
AR = D
a
Qpc
Pm
bConsumer
surplus
Producersurplus
Deadweightwelfare loss
MC(= S under perfect competition)
(b) Industry equilibrium under monopoly(b) Industry equilibrium under monopoly
Deadweight loss under monopolyDeadweight loss under monopoly
O
£
Q
Ppc
Qpc
AR = D
Consumersurplus
Producersurplus
MC(= S under perfect competition)
(a) Industry equilibrium under perfect competition(a) Industry equilibrium under perfect competition
a
Perfectcompetition
Deadweight loss under monopolyDeadweight loss under monopoly
MRO
£
Q
Ppc
Qpc
AR = D
a
Qpc
Pm
bConsumer
surplus
Producersurplus
Deadweightwelfare loss
MC(= S under perfect competition)
(b) Industry equilibrium under monopoly(b) Industry equilibrium under monopoly
Monopoly
Deadweight loss under monopolyDeadweight loss under monopoly
Types of Market FailureTypes of Market Failure
• Ignorance and uncertainty
– by consumers
– by firms
• Immobility of factors and time lags
• Protecting people’s interests
– dependants
– merit goods
• Ignorance and uncertainty
– by consumers
– by firms
• Immobility of factors and time lags
• Protecting people’s interests
– dependants
– merit goods
Government Intervention in the MarketGovernment Intervention in the Market
• Taxes and subsidies
– to correct externalities
• Taxes and subsidies
– to correct externalities
Q1O
MC = S
DP
Co
sts
and
be
nef
its
Quantity
Using taxes to correct a market distortionUsing taxes to correct a market distortion
O
MC = S
DP
MSC
Co
sts
and
be
nef
its
Quantity
External cost
Q1Q2
Social optimum
Using taxes to correct a market distortionUsing taxes to correct a market distortion
Q2
MC
Q1O
P
Co
sts
and
be
nef
its
Quantity
Optimum tax = MSC – MC
MC = SMSC
D
Using taxes to correct a market distortionUsing taxes to correct a market distortion
O
DP
MC = S
Q1
Co
sts
and
be
nef
its
Quantity
Using subsidies to correct a market distortionUsing subsidies to correct a market distortion
O
MSC
DP
Q1
External benefit
Co
sts
and
be
nef
its
Quantity
MC = S
Q2Social optimum
Using subsidies to correct a market distortionUsing subsidies to correct a market distortion
MC
O
P
Q2Q1
Co
sts
and
be
nef
its
Quantity
Optimum subsidy
= MC – MSC
MSCMC = S
D
Using subsidies to correct a market distortionUsing subsidies to correct a market distortion
Government Intervention in the MarketGovernment Intervention in the Market
• Taxes and subsidies (cont.)
– to correct for monopoly
• use of lump-sum taxes plus subsidies
– advantages of taxes and subsidies
• can vary the rate according to the size of the market distortion
– disadvantages of taxes and subsidies
• infeasible to use different tax and subsidy rates
• lack of knowledge
• Taxes and subsidies (cont.)
– to correct for monopoly
• use of lump-sum taxes plus subsidies
– advantages of taxes and subsidies
• can vary the rate according to the size of the market distortion
– disadvantages of taxes and subsidies
• infeasible to use different tax and subsidy rates
• lack of knowledge
Government Intervention in the MarketGovernment Intervention in the Market
• Changes in property rights
– the problem of limited property rights
– extending property rights
– limitations of this solution
• Laws prohibiting behaviour that imposes external costs
– advantages of legal restrictions
– disadvantages of legal restrictions
• Regulatory bodies
• Changes in property rights
– the problem of limited property rights
– extending property rights
– limitations of this solution
• Laws prohibiting behaviour that imposes external costs
– advantages of legal restrictions
– disadvantages of legal restrictions
• Regulatory bodies
Government Intervention in the MarketGovernment Intervention in the Market
• Price controls– high minimum prices
– low maximum prices
• Provision of information
• Direct provision of goods and services– justification
• social justice
• large positive externalities
• dependants
• ignorance
• Price controls– high minimum prices
– low maximum prices
• Provision of information
• Direct provision of goods and services– justification
• social justice
• large positive externalities
• dependants
• ignorance
The Case for Laissez-faireThe Case for Laissez-faire
• Drawbacks of government intervention
– shortages and surpluses
– poor information
– bureaucracy and inefficiency
– lack of market incentives
– shifts in government policy
– voters’ ignorance
– unrepresentative government
– lack of freedom for the individual
• Drawbacks of government intervention
– shortages and surpluses
– poor information
– bureaucracy and inefficiency
– lack of market incentives
– shifts in government policy
– voters’ ignorance
– unrepresentative government
– lack of freedom for the individual
The Case for Laissez-faireThe Case for Laissez-faire
• Advantages of the free market– automatic adjustments
– dynamic advantages of capitalism
– high degree of competition even under monopoly/oligopoly
• possible market contestability
• competition from other closely related industries
• threat of competition from abroad
• countervailing powers
• competition for corporate control
• Judging the arguments
• Advantages of the free market– automatic adjustments
– dynamic advantages of capitalism
– high degree of competition even under monopoly/oligopoly
• possible market contestability
• competition from other closely related industries
• threat of competition from abroad
• countervailing powers
• competition for corporate control
• Judging the arguments
Firms and Social ResponsibilityFirms and Social Responsibility
• The classical view on social responsibility
– managers solely responsible to shareholders
– justification and criticisms of this view
• The socio-economic view
– a stakeholding society
– corporate social responsibility
– environmental scanning
• The classical view on social responsibility
– managers solely responsible to shareholders
– justification and criticisms of this view
• The socio-economic view
– a stakeholding society
– corporate social responsibility
– environmental scanning
Firms and Social ResponsibilityFirms and Social Responsibility
• The virtue matrix– a framework for analysing corporate social
responsibility
– the civil foundation• laws and regulation
• social and moral norms
– the frontier• socially beneficial and potentially profitable activities
• socially beneficial but unprofitable activities
• The virtue matrix– a framework for analysing corporate social
responsibility
– the civil foundation• laws and regulation
• social and moral norms
– the frontier• socially beneficial and potentially profitable activities
• socially beneficial but unprofitable activities
The Virtue Matrix:generating corporate social responsibility
The Virtue Matrix:generating corporate social responsibility
Response tosocial normsResponse tosocial norms
Response tolaws and
regulations
Response tolaws and
regulations
Socially beneficial and
potentially profitable
Socially beneficial and unprofitable
CIVIL FOUNDATION
THE'FRONTIER'
Firms and Social ResponsibilityFirms and Social Responsibility
• The virtue matrix– a framework for analysing corporate social
responsibility
– the civil foundation• laws and regulation
• social and moral norms
– the frontier• socially beneficial and potentially profitable activities
• socially beneficial but unprofitable activities
– development of corporate social responsibility over time
• The virtue matrix– a framework for analysing corporate social
responsibility
– the civil foundation• laws and regulation
• social and moral norms
– the frontier• socially beneficial and potentially profitable activities
• socially beneficial but unprofitable activities
– development of corporate social responsibility over time
The Virtue Matrix:generating corporate social responsibility
The Virtue Matrix:generating corporate social responsibility
Response tosocial normsResponse tosocial norms
Response tolaws and
regulations
Response tolaws and
regulations
Socially beneficial and
potentially profitable
Socially beneficial and unprofitable
CIVIL FOUNDATION
THE'FRONTIER'
Firms and Social ResponsibilityFirms and Social Responsibility
• The virtue matrix– a framework for analysing corporate social
responsibility
– the civil foundation• laws and regulation
• social and moral norms
– the frontier• socially beneficial and potentially profitable activities
• socially beneficial but unprofitable activities
– development of corporate social responsibility over time
– globalisation and corporate social responsibility
• The virtue matrix– a framework for analysing corporate social
responsibility
– the civil foundation• laws and regulation
• social and moral norms
– the frontier• socially beneficial and potentially profitable activities
• socially beneficial but unprofitable activities
– development of corporate social responsibility over time
– globalisation and corporate social responsibility
Firms and Social ResponsibilityFirms and Social Responsibility
• Economic performance and social responsibility
– possible costs to the firm
– possible benefits to the firm
• improved economic performance
• enhancing the brand
• attracting and retaining employees
• access to capital
• Economic performance and social responsibility
– possible costs to the firm
– possible benefits to the firm
• improved economic performance
• enhancing the brand
• attracting and retaining employees
• access to capital