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Market Failure and Government Intervention

Access to information does not mean that managers of a firm must know everything about a market, but only that they be able to find out what other managers in the market know or are able to know.  Great opportunities to enter a market often occur precisely when there is little or no information about the market.  

E.  Equity

The private market can sometimes lead to an inequitable distribution of resources.  When a society determines that a more equitable distribution is necessary, then government may intervene to engineer such a redistribution.  One measurable standard of equity is the equal distribution of resources.

Equality in the distribution of resources or the income from those resources can be measured with the Lorenz curve.  The Lorenz curve portrays the cumulative percentage of resources (or income) distributed to owners.  The owners are grouped from the poorest to the richest.  For example Table 17-3 groups nations into quintiles (5 groups) on the basis of the per capita incomes of their people.  By cumulating each quintile's income (measured by the Gross National Product (GNP) in column 5 of Table 17-3) and we have the Lorenz curve (Figure 17-5).

The Lorenz curve provides a quick visual summary of equality or inequality.  The curve always starts at zero and ends at 100%.  If the curve is a straight line it is called the line of equality and it marks a perfectly equal distribution of income.  In other words, the lowest 20% of the population has 20% of the income and each subsequent quintile has a percentage of total income proportional to its percentage of total population.  However, if the curve follows the x-axis up until the last person, then one person would have the entire income and no one else would have anything; a situation of perfect inequality.  The current distribution of world wide GNP is in fact closer to this unequal case.

The degree of inequality can actually be summarized by a single number, called the Gini Coefficient.  The Gini Coefficient divides (a) the area between the line of equality and the Lorenz curve (shaded in Figure 17-5) by (b) the total area below the line of equality.  In Table 17-3 the first area has been estimated by approximating the amount of inequality existing for each quintile (column 8) and adding them together for a numeric total of 3281.  The area under the line of equality is a triangle, the base of which is the x-axis (measuring 100%) and the height of which is the y-axis (also measuring 100%); the triangle is half the area of the base times the height which means it has a numerical value of 5000.  The Gini Coefficient is therefore .6562.

Table 17-3

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