Scribd
Upload
9 views

PublicGOODS TOPIC8

This document discusses different views of the role of government in the market economy. It describes the organic view which sees society as a natural organism where the goals of individuals and society are aligned. The mechanistic view sees government as an artificial contrivance created by individuals to achieve their goals. The document also discusses market failures like monopoly, public goods, externalities, incomplete markets, and information problems that provide rationales for government intervention in the economy. It outlines government functions like allocation of resources, distribution of income, and macroeconomic stabilization.

Uploaded by

honeybgt999
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
9 views

PublicGOODS TOPIC8

This document discusses different views of the role of government in the market economy. It describes the organic view which sees society as a natural organism where the goals of individuals and society are aligned. The mechanistic view sees government as an artificial contrivance created by individuals to achieve their goals. The document also discusses market failures like monopoly, public goods, externalities, incomplete markets, and information problems that provide rationales for government intervention in the economy. It outlines government functions like allocation of resources, distribution of income, and macroeconomic stabilization.

Uploaded by

honeybgt999
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 21

THE ROLE OF THE

GOVERNMENT IN
THE MARKET
ECONOMY
ROSEN / GAYVER , Public Finance 10th Edition

HIRSCHEY, Managerial Economics 12th Edition


ALTERNATIVE VIEWS OF
THE GOVERNMENT
O •Organic View
–society is conceived as a natural organism

O Mechanistic View
–government is a contrivance created by
individuals to better achieve their individual
goals
O •Organic View
–What is good for the individual is good for the
whole community and vice versa.
–Goals of the society are set by the state,
which leads society toward fulfilling those
goals.
–Emphasis is on social goals
–Society or community is above the individual.
O Mechanistic View
–Government is not an organic part of society.
Rather, it is a contrivance created by
individuals to better achieve their individual
goals.
–Government is a contrivance erected to
further individual goals. It is not clear how the
government can reconcile sometimes
conflicting individual goals.
–At the centre of attention is the individual,
not the group, not the society.
In the Mechanical View we can distinguish:
O •Libertarians vs Social Democrats

O •Libertarians
–believe in a very limited government
–In Smith’s words, “Every man, as long as he does
not violate the laws of justice, is left perfectly free
to pursue his own interest his own way”

O •Social democrats
–believe that substantial government intervention
is required for the good of individuals.

O •Mainstream Economics
–Individuals and their wants are the main focus
MARKET FAILURE AND THE ROLE
OF THE GOVERNMENT
1. Failure of competition
–Monopolies
–Oligopolies
•Pure Competition (IDEAL)
–a large number of buyers & firms : each one
too small
–perfect resource mobility or the freedom of
entry into and exit
MARKET FAILURE AND THE ROLE
OF THE GOVERNMENT
2. Public goods
–Goods that either will not be supplied by the
market or, if supplied, will be supplied in
insufficient quantities
–Consumption is nonrival: once it is provided,
the additional resource cost of another person
consuming the good is zero.
–Consumption is nonexcludable: to prevent
anyone from consuming the good is either very
expensive or impossible.
MARKET FAILURE AND THE ROLE
OF THE GOVERNMENT
3. Externalities
–Uncompensated impact of the actions of one
entity affecting another
–cause markets to be inefficient, and thus fail
to maximize total surplus.
O –Negative externality
O –Positive Externality
MARKET FAILURE AND THE ROLE
OF THE GOVERNMENT
4. Incomplete markets
–When private markets fail to provide a good
or service even though the cost of providing it
is less than what individuals are willing to pay
–total supply is insufficient to meet the needs
of consumers
MARKET FAILURE AND THE ROLE
OF THE GOVERNMENT
5. Information failure
–Stems from the belief that the market by
itself will provide too little information
–Efficiency requires that information be freely
disseminated or, more accurately, that the only
charge be for the actual cost of transmitting
the information.
–The private market will often provide an
inadequate supply of information
MARKET FAILURE AND THE ROLE
OF THE GOVERNMENT
6. Merit goods
–Goods that the government must compel
individuals to consume or not consume
–People do not realise the true benefit.
–Usually these goods have positive externalities.
•De-merit goods
–a good or service whose consumption is
considered unhealthy, degrading, or socially
undesirable due to the perceived negative effects
on the consumers.
–It is over-consumed if left to market forces.
MARKET FAILURE AND THE ROLE
OF THE GOVERNMENT
7. Periodic episodes of macroeconomic
problems
–Unemployment
–Inflation
–disequilibrium
8. Equity motive for government action
–May be motivated by the inequality of
income, opportunity, or wealth
–the redistribution of resources
GOVERNMENT FUNCTIONS

•Allocation Function
–Involves the provision of public goods, or the
process by which total resource use is divided
between private and public goods and by
which the mix of public goods is chosen.
•Rationale for the provision of public goods:
–Non-rivalness
–Infeasibility of exclusion principle
GOVERNMENT FUNCTIONS
•Distribution Function
O –This function involves the adjustment of the
distribution of income and wealth to assure
conformance with what society considers a “fair” or
“just” state of distribution.

O •Utilitarian view: “The highest utility for the greatest


number.”
O •Egalitarian view: “All individuals receive an equal
amount of goods.”
O •Rawlsian view: “Maximize the welfare of the least
well-off (the most disadvantaged) in the society.”
GOVERNMENT FUNCTIONS
•Stabilization
–Stabilization involves the use of budget policy as a
means to attaining macroeconomic goals, with
allowances for effects on trade and on the balance of
payments.
•Need for stabilization policy
–Full employment and price level stability do not
automatically occur and the economy tends to be
subject to substantial fluctuations.
–Rigid adjustment processes in the economy may call
for mechanisms to restore employment or to control
inflation.
1.Describe the government policies or
programs listed below in terms of objectives
and specific interventions. Then Identify the
market failure embodied in each. Explain your
answer.
O a.Free Mobile Disaster Alerts Act
O b.Graphic Health Warning Law
O c.Iskolar Ng Bayan Act
O d.Truth in Lending Act
O e. Philippine Clean Air Act
MARKET FAILURE
O FAILURE OF COMPETITION
O PUBLIC GOODS
O EXTERNALITIES (POSITVE / NEGATIVE)
O INCOMPLETE MARKETS
O INFORMATION FAILURE
O MERIT / DEMERIT GOODS
O PERIODIC EPISODES OF MACROECONOMIC
PROBLEM
O EQUITY MOTIVE FOR GOVERNMENT ACTION

You might also like