Chapter 6 - Why intervene

Question 1

(3) REASONS WHY A GOV’T MAY STEP IN AND INTERVENE IN A MARKET:

Answer 1

• CORRECTING MARKET FAILURES
• MARKET FAILURES
• CHANGING THE DISTRIBUTION OF SURPLUS
• ENCOURAGING / DISCOURAGING CONSUMPTION

Question 2

CORRECTING MARKET FAILURES

Answer 2

Our model of demand and supply has so far assumed that markets work efficiently—but in the real world, that’s not always true

–> Example: sometimes there is only one producer of a good –> who faces no competition and can charge an inefficiently high price

–> Other times, one person’s use of a product or service imposes costs on other people that are not captured in prices paid by the first person (e.g., pollution caused by burning the gas in your car)

Question 3

MARKET FAILURES

Answer 3

Situations in which the assumption of efficient, competitive markets fails to hold
cigarettes and alcohol

–> When there is a market failure, intervening can actually increase the total surplus.

Question 4

CHANGING THE DISTRIBUTION OF SURPLUS

Answer 4

Efficient markets maximize total surplus
–> but an efficient outcome may still be seen as unfair.

–>Example: even if the job market is efficient, wages can still drop so low that some workers fall below the poverty line while their employers make healthy profits

–> Gov’t = might respond by intervening in the labor market to impose a minimum wage

• -> This policy = will change the distribution of surplus
• reducing employers’ profits and lifting workers’ incomes