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Lecture 3. Presentation. Government Failure, Positive Vs Normative Analysis

The document discusses the role of government in a market economy and introduces the concept of public economics. It covers the fundamental theorem of welfare economics, market failures as a rationale for government intervention, potential government failures, and the difference between positive and normative economic analysis.

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Thùy Trang
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10 views

Lecture 3. Presentation. Government Failure, Positive Vs Normative Analysis

The document discusses the role of government in a market economy and introduces the concept of public economics. It covers the fundamental theorem of welfare economics, market failures as a rationale for government intervention, potential government failures, and the difference between positive and normative economic analysis.

Uploaded by

Thùy Trang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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LOGO

PUBLIC ECONOMICS
Pareto conditions for efficiency

CHAPTER 1 (cont.)
OVERVIEW ON THE ROLE OF THE STATE IN THE MARKET
ECONOMY AND INTRODUCTION OF THE PUBLIC
ECONOMICS COURSE
Day 03

Rationales for the role of


government in market economy

2
2.3. Fundamental theorem of welfare economics

Perfect competition Certain conditions Pareto efficiency

❖ Can you prove that theorem?


❖ What are limitations of the theorem?
▪ Market failures: Nonexistence of perfect competition
▪ Fairness versus efficiency
▪ Certain conditions: Economic stability and Closed economy
➔ If limitation occurs, there is no guarantee that the market
economy will produce socially desired outcomes
➔ Need government interventions

3
2.4. Market failures and call for government intervention

Limitation of the Theorem Role of government


Market failures: situation in which the
Resource reallocation: To correct
allocation of goods and services is not
market failures:
socially efficient.
• Monopoly
- Monopoly
• Externalities
- Public goods
• Public Goods
- Externalities
• Asymmetric Information
- Asymmetric information
Failure to ensure fairness/equity Income redistribution
• For equality
• Merit goods
Macroeconomic instability Macroeconomic stabilization
(Macroeconomics)
Globalization and international Protection of national interests
integration (Macroeconomics in open economy)
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2.5. Government failures

❖ a situation ❖Causes:
where governme
nt intervention in
the economy to
correct a
market failure cre 2. Lack of
1. Inadequate information controllability towards
ates inefficiency
individuals’ reactions
and leads to a
misallocation of
scarce resources.
➔ Many policy
failures are paved
3. Lack of controllability
by good intention 4. Constraints of
towards public servants
political process
5
Conclusion

The best government is the one with minimal


intervention

6
3. Positive and normative analysis

Positive economics:
❖ The study of economics based on objective analysis.
❖ Focuses on causes and effects, behavioral relationships, and
facts involved in the evolution and development of economic
theories.
❖ Positive economics is often called the "what is" economics.

Example:
❖ “Increasing the interest rate will encourage people to save”
❖ Why this is considered a positive economic statement?

Because:
➔ it does not contain value judgements and
➔ its accuracy can be tested.

7
3. Positive and normative analysis (2)

Normative economics:
❖ A perspective on economics that reflects personal judgments or opinions
and reactions toward economic projects, statements, and scenarios.
❖ Heavily concerns with value judgments and theoretical scenarios and
economic statements that present "what ought to be" rather than facts and
cause-and-effect statements.
❖ Expresses judgments about what may result of economic activities if public
policy changes are done.
❖ Normative economics is often called the “ought-to-be" economics.

Example:
❖ “We should cut taxes in half to increase disposable income levels”
❖ Why this is considered a normative economic statement?

Because:
➔ it mirrors value judgements, which assumes that disposable income must
be increased
➔ its accuracy cannot be tested.

8
Difference between positive and normative
analysis

Positive analysis Normative analysis


Objective and fact-based Subjective and value-based
Do not have to be correct, but must be Opinion based, impossible to prove or
able to be tested and proved or disprove
disproved
Example: Example:
“Government-provided healthcare “Government should provide basic
increases public expenditures” healthcare to all citizens”

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Discussion: Normative or Positive
statement?

❖ Lowering the price of cigarettes has increased the


demand for cigarettes among teenage consumers.
❖ Women should be provided higher school loans
than men.
❖ Working citizens should not pay for hospital care.
❖ The rise of crude oil prices lessens the use of cars
and increases the demand for bicycles.
❖ Laborers should receive greater parts of capitalist
profits
❖ Brewer profits will drop if the government taxes
alcohol.

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