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Market Failure and Government Intervention

they should be ranked or weighed if they cannot be achieved simultaneously.

(2)Constraints.   Constraints block the attainment of objectives.  Terms such as "limits", "boundaries", and "restraints" are some of the alternative words that are used to express the existence of constraints.  The constraints that can prevent the achievement of an objective must be known before a problem can be solved.

(3)Choices.  There must be some choices available to a decision maker with which to influence how much of an objective can be achieved.  

Table 17-1 lists some of the major objectives, constraints and choices used in the problem solving of different kinds of economic units.  

However, on closer analysis we are likely to find that these different units are continually making tradeoffs between a variety of different objectives.  Even within a single household, some individuals spend all of their time bringing in money while others spend their time spending it.  Some individuals save to experience satisfaction after they retire, while others want satisfaction now.  Some individuals focus on what is good for the family, while others focus on what is good for themselves.  A household cannot have everything that it wants, and so it must make tradeoffs.

Whenever tradeoffs must be made between objectives, the concept of opportunity cost becomes useful.  In its widest sense, the opportunity cost of a choice is the satisfaction or value of the choice that was not made.  Traditionally economists evaluate the most efficient way to produce a good, given the available resources.  The opportunity cost of producing the good is measured in terms of the foregone, next-best, alternative good that could have been produced with the resources.  In making the decision for you to be in college, your family might have to forego buying a new car.  If buying that car was the next best use of the family resources, then the opportunity cost to the family of your education is the value of that foregone car.

Table 17-1  Objectives, Constraints, and Choices

Economic unit

Objectives

Constraints

Choices

Households

Maximum satisfaction

Budget, Time

Goods and Services

Firms

Maximum Profit

Fixed Resources

Amounts of Resources and Output

Government

Maximum social welfare

Budget, Fixed Resources

Taxation, Regulation, Public Production, Expenditures

NOTE:  Each economic unit faces objectives, constraints, and choices.  Therefore, the similar

economic problem solving techniques can often be applied to all types of these different units.

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