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Market Failure and Government Intervention

consumption and can be allocated strictly to the people who buy the good.  A purely private good does not have impacts on parties other than the seller and buyer which means there are no externalities.  By contrast a pure public good cannot be divided into discrete quantities that each customer can buy, and it actually costs something to exclude some people from enjoying the good.  

A good which does not have complete divisibility or excludability may be difficult for a private market to deliver at the social optimum.   Without excludability people have an incentive to let someone else pay and then become free riders in the enjoyment of the good once it has been paid for.  Frequently indivisible goods or services- those which cannot be divided among consumers-  do not have complete excludability.  We cannot subdivide a park, giving everyone in the city a square inch of it.  Effectively there is a choice to have the park or not to have it; after deciding to have the park, everyone can use it and it would cost a great deal of money to try to exclude anyone.  

The means of correcting the problems of indivisibility and non-excludability are similar to the means for correcting externalities that were examined above.  One of the most potent weapons of our legal system is the legal procedure for ascribing blame and assessing damages from those responsible.  For example, the problem of excludability becomes a problem with a public bad like terrorism.  There is no way to insulate anyone from the effects and it is costly and difficult to allocate the effects to the people who cause the problem.  

D.  Information

For firms to contest in a market, there must be information not only on the profitability of the market but upon the technology necessary to enter the market.  A firm must be able to find knowledgeable personnel, know what resources to use, know how to use them, and know demand conditions in order to enter a market successfully.  Information provides customers with the ability to bargain prices downward to the costs of providing a good.  Information also allows sellers to find the best markets for their goods.  

Information “asymmetry” is reported often in the media.  It occurs every time that someone makes use of insider information to enrich themselves before the “principals” of an organization are able to benefit.  When Sam Waksal clued Martha Stewart about the failure of a cancer drug and she sold her stock, the government put her in prison.  The Securities and Exchange Commission (SEC), Federal Trade Commission (FTC), Commodities Futures Trading Commission (CFTC)  and many other market overseers guard not only against insider information but misinformation as well.  In many cases they require organizations to provide information.

With imperfect access to information by either customers or buyers a market may not reach a social optimum.  To assure that markets work efficiently the government may intervene to provide adequate information as it does in agriculture, utilities, the banking system, the business census, and labor.

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