Markets, Efficiency andMarkets, Efficiency andthe Public Interestthe Public Interest

Markets, Efficiency and the Public InterestMarkets, Efficiency and the Public Interest

Efficiency under Perfect Competition

Efficiency under Perfect Competition

EFFICIENCY UNDER PERFECT COMPETITIONEFFICIENCY UNDER PERFECT COMPETITION

• Defining social efficiency

– Pareto improvements

– Pareto optimality

• Private efficiency

– ‘rational’ economic behaviour

– equating marginal benefits and marginal costs

• Defining social efficiency

– Pareto improvements

– Pareto optimality

• Private efficiency

– ‘rational’ economic behaviour

– equating marginal benefits and marginal costs

• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P

– efficiency in production: P = MC

• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P

– efficiency in production: P = MC

EFFICIENCY UNDER PERFECT COMPETITIONEFFICIENCY UNDER PERFECT COMPETITION

Maximum total surplus under perfect competitionMaximum total surplus under perfect competition

O

£

Q

D = MU

Pe

Qe

MC

B

O

MC

£

Q

D = MU

Pe

Qe

C

A

Maximum total surplus under perfect competitionMaximum total surplus under perfect competition

• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P

– efficiency in production: P = MC

– assumption of no externalities

• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P

– efficiency in production: P = MC

– assumption of no externalities

EFFICIENCY UNDER PERFECT COMPETITIONEFFICIENCY UNDER PERFECT COMPETITION

• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P

– efficiency in production: P = MC

– assumption of no externalities

– social efficiency in goods markets:MSB = MSC

• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P

– efficiency in production: P = MC

– assumption of no externalities

– social efficiency in goods markets:MSB = MSC

EFFICIENCY UNDER PERFECT COMPETITIONEFFICIENCY UNDER PERFECT COMPETITION

B

O

MC

£

Q

D = MU

Pe

Qe

C

A

Maximum total surplus under perfect competitionMaximum total surplus under perfect competition

• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P

– efficiency in production: P = MC

– assumption of no externalities

– social efficiency in goods markets:MSB = MSC

– social efficiency in factor markets:MSBf = MSCf

• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P

– efficiency in production: P = MC

– assumption of no externalities

– social efficiency in goods markets:MSB = MSC

– social efficiency in factor markets:MSBf = MSCf

EFFICIENCY UNDER PERFECT COMPETITIONEFFICIENCY UNDER PERFECT COMPETITION

• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P

– efficiency in production: P = MC

– assumption of no externalities

– social efficiency in goods markets:MSB = MSC

– social efficiency in factor markets:MSBf = MSCf

• Interdependence, efficiency and the invisible hand

• Achieving social efficiency under perfect competition– efficiency in consumption: MU = P

– efficiency in production: P = MC

– assumption of no externalities

– social efficiency in goods markets:MSB = MSC

– social efficiency in factor markets:MSBf = MSCf

• Interdependence, efficiency and the invisible hand

EFFICIENCY UNDER PERFECT COMPETITIONEFFICIENCY UNDER PERFECT COMPETITION

FIRMSFIRMS(suppliers of goods and services,(suppliers of goods and services,

demanders of factor services)demanders of factor services)

HOUSEHOLDSHOUSEHOLDS(demanders of goods and services,(demanders of goods and services,

suppliers of factor services)suppliers of factor services)

The interdependence of goods and factor marketsThe interdependence of goods and factor markets

££

££ (1) Consumer(1) Consumer demanddemand

D1 = MU1

= MSBG1

P

QO

The interdependence of goods and factor marketsThe interdependence of goods and factor markets

££

££

Goods

Goods

D1 = MU1

= MSBG1

(1) Consumer(1) Consumer demanddemand

(2) Producer(2) Producer supplysupply

P

Q

S = MC = MSCG

O

The interdependence of goods and factor marketsThe interdependence of goods and factor markets

££

££

Goods

Goods

(1) Consumer(1) Consumer demanddemand

(2) Producer(2) Producer supplysupply

P

Q

S

D1

P1

Q1O

The interdependence of goods and factor marketsThe interdependence of goods and factor markets

££ ££

££££

Goods

Goods

D1 = MRPF1 = MSBF1

(1) Consumer(1) Consumer demanddemand

(3) Factor(3) Factor demanddemand

(2) Producer(2) Producer supplysupply

P

QO

P

Q

S

D1

P1

Q1O

The interdependence of goods and factor marketsThe interdependence of goods and factor markets

P

Q

££ ££

££££

Factorservices

Goods

GoodsFactor

services

S = MDUF

= MSCF

D1 = MRPF1 = MSBF1

(1) Consumer(1) Consumer demanddemand

(4) Factor(4) Factor supplysupply

(3) Factor(3) Factor demanddemand

(2) Producer(2) Producer supplysupply

O

P

Q

S

D1

P1

Q1O

The interdependence of goods and factor marketsThe interdependence of goods and factor markets

P

Q

££ ££

££££

Factorservices

Goods

Goods

(1) Consumer(1) Consumer demanddemand

(4) Factor(4) Factor supplysupply

(3) Factor(3) Factor demanddemand

(2) Producer(2) Producer supplysupply

PF1

QF1O

P

Q

S

D1

P1

Q1O

Factorservices

S

D1

The interdependence of goods and factor marketsThe interdependence of goods and factor markets

P

Q

££ ££

££££

Factorservices

Goods

Goods

S

D1

(1) Consumer(1) Consumer demanddemand

(4) Factor(4) Factor supplysupply

(3) Factor(3) Factor demanddemand

(2) Producer(2) Producer supplysupply

O

PF1

QF1

P

Q

S

D1

P1

Q1O

D2 = MU2

= MSBG2

P2

Q2

Factorservices

The interdependence of goods and factor marketsThe interdependence of goods and factor markets

P

Q

P

Q

££ ££

££££

Factorservices

Goods

Goods

S S

D1 D1

(1) Consumer(1) Consumer demanddemand

(4) Factor(4) Factor supplysupply

(3) Factor(3) Factor demanddemand

(2) Producer(2) Producer supplysupply

P1

Q1OO

D2 = MU2

= MSBG2

P2

Q2

D2 = MRPF2

= MSBF2

PF1

QF1

PF2

QF2

Factorservices

The interdependence of goods and factor marketsThe interdependence of goods and factor markets

Markets, Efficiency and the Public InterestMarkets, Efficiency and the Public Interest

Social Efficiency: Intermediate Analysis

Social Efficiency: Intermediate Analysis

SOCIAL EFFICIENCY: INTERMEDIATE ANALYSISSOCIAL EFFICIENCY: INTERMEDIATE ANALYSIS

• Private efficiency in goods markets– in consumption:

MUX / MUY (MRS) = PX / PY

– in production:MCX / MCY (MRT) = PX / PY

• Social efficiency in goods markets– between consumers:

MRSa = MRSb ... = MRSn

– between producers:MRTg = MRTh ... = MRTn

– in exchange (assuming no externalities):social MRS = social MRT

• Private efficiency in goods markets– in consumption:

MUX / MUY (MRS) = PX / PY

– in production:MCX / MCY (MRT) = PX / PY

• Social efficiency in goods markets– between consumers:

MRSa = MRSb ... = MRSn

– between producers:MRTg = MRTh ... = MRTn

– in exchange (assuming no externalities):social MRS = social MRT

• Social efficiency in factor markets

• The achievement of general equilibrium

• Social efficiency in factor markets

• The achievement of general equilibrium

SOCIAL EFFICIENCY: INTERMEDIATE ANALYSISSOCIAL EFFICIENCY: INTERMEDIATE ANALYSIS

O

Go

od

Y

Good X

Productionpossibility curve

Slope = MRT

Social efficiency under perfect competitionSocial efficiency under perfect competition

O

I3

I2

I1

Go

od

Y

Good X

Slope = MRS

Social indifference curves

Slope = MRT

Social efficiency under perfect competitionSocial efficiency under perfect competition

O

I3

I2

I1

Go

od

Y

Good X

Market priceratio

Slope = MRS

Slope = PX / PY

Slope = MRT

s

MRS = PX / PY = MRT

Social efficiency under perfect competitionSocial efficiency under perfect competition

Markets, Efficiency and the Public InterestMarkets, Efficiency and the Public Interest

The Case for Government Intervention

The Case for Government Intervention

CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION

• Externalities

– External costs of production MSC > MC

• Externalities

– External costs of production MSC > MC

Q1

External costs in productionExternal costs in production

O

MC = S

DP

Co

sts

and

be

nef

its

Quantity

O

MC = S

DP

MSC

Co

sts

and

be

nef

its

Quantity

External cost

Q1Q2

Social optimum

External costs in productionExternal costs in production

CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION

• Externalities

– External costs of production MSC > MC

– External benefits of production MSC < MC

• Externalities

– External costs of production MSC > MC

– External benefits of production MSC < MC

External benefits in productionExternal benefits in production

O

DP

MC = S

Q1

Co

sts

and

be

nef

its

Quantity

O

MSC

DP

Q1

External benefit

Co

sts

and

be

nef

its

Quantity

MC = S

Q2Social optimum

External benefits in productionExternal benefits in production

O

MC = S

DP

Q1Q2

Cos

ts a

nd b

enef

its (

£)

Quantity

MSC

External cost

(a ) External costs

O

DP

Q2Q1

Cos

ts a

nd b

enef

its (

£)

Quantity

MSCMC = S

External benefit

(b) External benefits

External costs and benefits in productionExternal costs and benefits in production

CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION

• Externalities

– External costs of production MSC > MC

– External benefits of production MSC < MC

– External costs of consumption MSB < MB

• Externalities

– External costs of production MSC > MC

– External benefits of production MSC < MC

– External costs of consumption MSB < MB

Q1

(MB)MU = D

External costs in consumptionExternal costs in consumption

O

DP

Co

sts

and

be

nef

its

Quantity

Q2

(MB)MU = D

O

DP

Co

sts

and

be

nef

its

Quantity

External cost

MSB

Q1

External costs in consumptionExternal costs in consumption

Social optimum

CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION

• Externalities

– External costs of production MSC > MC

– External benefits of production MSC < MC

– External costs of consumption MSB < MB

– External benefits of consumption MSB > MB

• Externalities

– External costs of production MSC > MC

– External benefits of production MSC < MC

– External costs of consumption MSB < MB

– External benefits of consumption MSB > MB

(MB)MU = D

O

DP

Q1

Co

sts

and

be

nef

its

Quantity

External benefits in consumptionExternal benefits in consumption

Q2

(MB)MU = D

O

DP

Q1

Co

sts

and

be

nef

its

Quantity

External benefit

MSB

Social optimum

External benefits in consumptionExternal benefits in consumption

O

MB

PP

Cos

ts a

nd b

enef

its (

£)

Car miles

MSB

External cost

O

MB

PP

Q1

Cos

ts a

nd b

enef

its (

£)

Rail miles

Q2

MSB

External benefit

(a ) External costs (b) External benefits

External costs and benefits in consumptionExternal costs and benefits in consumption

Q1Q2

• Public goods– Non-rivalry

– Non-excludability: free-rider problem

• Common resources– equilibrium use of a common resource

• Public goods– Non-rivalry

– Non-excludability: free-rider problem

• Common resources– equilibrium use of a common resource

CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION

£

Number of boats O

MRP

ARP

Fishing in open-access fishing groundsFishing in open-access fishing grounds

AC = MC

£

Number of boats O B1

MRP

ARP

Fishing in open-access fishing groundsFishing in open-access fishing grounds

AC = MC

B3B2

The collective optimumfor boat ownersBeyond this point nomore fish can be caught

Equilibrium: well beyondthe optimum

• Public goods– Non-rivalry

– Non-excludability: free-rider problem

• Common resources– equilibrium use of a common resource

– the tragedy of the commons

• Public goods– Non-rivalry

– Non-excludability: free-rider problem

• Common resources– equilibrium use of a common resource

– the tragedy of the commons

CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION

• Public goods– Non-rivalry

– Non-excludability: free-rider problem

• Common resources– equilibrium use of a common resource

– the tragedy of the commons

– current-day examples

• Public goods– Non-rivalry

– Non-excludability: free-rider problem

• Common resources– equilibrium use of a common resource

– the tragedy of the commons

– current-day examples

CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION

• Public goods– Non-rivalry

– Non-excludability: free-rider problem

• Common resources– equilibrium use of a common resource

– the tragedy of the commons

– current-day examples

• Market power

• Public goods– Non-rivalry

– Non-excludability: free-rider problem

• Common resources– equilibrium use of a common resource

– the tragedy of the commons

– current-day examples

• Market power

CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION

• Public goods– Non-rivalry

– Non-excludability: free-rider problem

• Common resources– equilibrium use of a common resource

– the tragedy of the commons

– current-day examples

• Market power– lack of Pareto optimality

• Public goods– Non-rivalry

– Non-excludability: free-rider problem

• Common resources– equilibrium use of a common resource

– the tragedy of the commons

– current-day examples

• Market power– lack of Pareto optimality

CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION

MC1

Q1

MC

MRAR

A monopolist producing less than the social optimumA monopolist producing less than the social optimum

O

P1

£

Monopoly output

Q

O

P1

MC1

MC = MSC

Q1

MRAR = MSB

Q2

P2 = MSB

= MSC

£

QMonopoly output Perfectly competitive output

A monopolist producing less than the social optimumA monopolist producing less than the social optimum

• Public goods– Non-rivalry

– Non-excludability: free-rider problem

• Common resources– equilibrium use of a common resource

– the tragedy of the commons

– current-day examples

• Market power– lack of Pareto optimality

– deadweight loss under monopoly

• Public goods– Non-rivalry

– Non-excludability: free-rider problem

• Common resources– equilibrium use of a common resource

– the tragedy of the commons

– current-day examples

• Market power– lack of Pareto optimality

– deadweight loss under monopoly

CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION

O

£

Q

Ppc

Qpc

AR = D

Consumersurplus

Producersurplus

Deadweight loss under monopolyDeadweight loss under monopolyMC

(= S under perfect competition)

(a) Industry equilibrium under perfect competition(a) Industry equilibrium under perfect competition

a

MRO

£

Q

Ppc

Qpc

AR = D

a

Qpc

Pm

bConsumer

surplus

Producersurplus

Deadweightwelfare loss

MC(= S under perfect competition)

(b) Industry equilibrium under monopoly(b) Industry equilibrium under monopoly

Deadweight loss under monopolyDeadweight loss under monopoly

O

£

Q

Ppc

Qpc

AR = D

Consumersurplus

Producersurplus

MC(= S under perfect competition)

(a) Industry equilibrium under perfect competition(a) Industry equilibrium under perfect competition

a

Perfectcompetition

Deadweight loss under monopolyDeadweight loss under monopoly

MRO

£

Q

Ppc

Qpc

AR = D

a

Qpc

Pm

bConsumer

surplus

Producersurplus

Deadweightwelfare loss

MC(= S under perfect competition)

(b) Industry equilibrium under monopoly(b) Industry equilibrium under monopoly

Monopoly

Deadweight loss under monopolyDeadweight loss under monopoly

• Ignorance and uncertainty

• Immobility of factors and time lags

• Protecting people’s interests

– dependants

– merit goods

• Other objectives

• Possible conflict between objectives

• Limitations of economics in assisting policy making

• Ignorance and uncertainty

• Immobility of factors and time lags

• Protecting people’s interests

– dependants

– merit goods

• Other objectives

• Possible conflict between objectives

• Limitations of economics in assisting policy making

CASE FOR GOVERNMENT INTERVENTIONCASE FOR GOVERNMENT INTERVENTION

Markets, Efficiency and the Public InterestMarkets, Efficiency and the Public Interest

Forms of Government Intervention

Forms of Government Intervention

FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION

• The problem of the second best– the first-best world– the second-best solution to market

distortions

• Taxes and subsidies– to correct externalities

• the first-best world

• The problem of the second best– the first-best world– the second-best solution to market

distortions

• Taxes and subsidies– to correct externalities

• the first-best world

Q1O

MC = S

DP

Co

sts

and

be

nef

its

Quantity

Using taxes to correct a market distortion (“first-best” world)Using taxes to correct a market distortion (“first-best” world)

O

MC = S

DP

MSC

Co

sts

and

be

nef

its

Quantity

External cost

Q1Q2

Social optimum

Using taxes to correct a market distortion (“first-best” world)Using taxes to correct a market distortion (“first-best” world)

Q2

MC

Q1O

P

Co

sts

and

be

nef

its

Quantity

Optimum tax = MSC – MC

MC = SMSC

D

Using taxes to correct a market distortion (“first-best” world)Using taxes to correct a market distortion (“first-best” world)

O

DP

MC = S

Q1

Co

sts

and

be

nef

its

Quantity

Using subsidies to correct a market distortion (“first-best” world)Using subsidies to correct a market distortion (“first-best” world)

O

MSC

DP

Q1

External benefit

Co

sts

and

be

nef

its

Quantity

MC = S

Q2Social optimum

Using subsidies to correct a market distortion (“first-best” world)Using subsidies to correct a market distortion (“first-best” world)

MC

O

P

Q2Q1

Co

sts

and

be

nef

its

Quantity

Optimum subsidy

= MC – MSC

MSCMC = S

D

Using subsidies to correct a market distortion (“first-best” world)Using subsidies to correct a market distortion (“first-best” world)

FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION

• The problem of the second best– the first-best world– the second-best solution to market

distortions

• Taxes and subsidies– to correct externalities

• the first-best world• second-best tax and subsidy policies

• The problem of the second best– the first-best world– the second-best solution to market

distortions

• Taxes and subsidies– to correct externalities

• the first-best world• second-best tax and subsidy policies

Using taxes to correct for externalities:firms with monopoly power

Using taxes to correct for externalities:firms with monopoly power

O

P1

MC

Q1

MRD = MSB

£

Q

Monopoly priceand output

O

P1

MC

Q1

MRD = MSB

£

Q

MSC

P2

Q2

Optimum priceand output

Using taxes to correct for externalities:firms with monopoly power

Using taxes to correct for externalities:firms with monopoly power

O

P1

MC

Q1

MRD = MSB

£

Q

MSC

P2

Q2

Optimum taxon the monopoly

MC + tax

Optimumtax

Using taxes to correct for externalities:firms with monopoly power

Using taxes to correct for externalities:firms with monopoly power

O

P1

MC

Q1

MRD = MSB

£

Q

MSC

P2

Q2

Continuing excess profitscan be reduced by a further lump-sum tax

MC + tax

Optimumtax

Using taxes to correct for externalities:firms with monopoly power

Using taxes to correct for externalities:firms with monopoly power

FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION

• The problem of the second best– the first-best world– the second-best solution to market

distortions

• Taxes and subsidies– to correct externalities

• the first-best world• second-best tax and subsidy policies

– to correct for monopoly

• The problem of the second best– the first-best world– the second-best solution to market

distortions

• Taxes and subsidies– to correct externalities

• the first-best world• second-best tax and subsidy policies

– to correct for monopoly

FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION

• The problem of the second best– the first-best world– the second-best solution to market

distortions

• Taxes and subsidies– to correct externalities

• the first-best world• second-best tax and subsidy policies

– to correct for monopoly• use of lump-sum taxes plus subsidies

• The problem of the second best– the first-best world– the second-best solution to market

distortions

• Taxes and subsidies– to correct externalities

• the first-best world• second-best tax and subsidy policies

– to correct for monopoly• use of lump-sum taxes plus subsidies

O

P =AR

MC

Q1

MR AR = MSB

£

Q

Using a lump-sum tax to reduce monopoly profitsUsing a lump-sum tax to reduce monopoly profits

ProfitProfit(no tax)(no tax)

O

MC

Q1

MR AR = MSB

£

Q

AC

AC

P =AR

Using a lump-sum tax to reduce monopoly profitsUsing a lump-sum tax to reduce monopoly profits

11

22

O

P1

MC

Q1

MR AR = MSB

£

Q

ACAC + lump-sum tax

AC

AC + tax

1. Acceptable profit2. Lump sum tax

necessary to achieve acceptable profit

Using a lump-sum tax to reduce monopoly profitsUsing a lump-sum tax to reduce monopoly profits

FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION

• The problem of the second best– the first-best world– the second-best solution to market

distortions

• Taxes and subsidies– to correct externalities

• the first-best world• second-best tax and subsidy policies

– to correct for monopoly• use of lump-sum taxes plus subsidies

– advantages and disadvantages of taxes and subsidies

• The problem of the second best– the first-best world– the second-best solution to market

distortions

• Taxes and subsidies– to correct externalities

• the first-best world• second-best tax and subsidy policies

– to correct for monopoly• use of lump-sum taxes plus subsidies

– advantages and disadvantages of taxes and subsidies

Deadweight loss from an indirect taxDeadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

Before-taxsituation

O

S

£

Q

D

P1

Q1

Before-taxsituation

Consumersurplus

Consumersurplus

Deadweight loss from an indirect taxDeadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

Consumersurplus

Consumersurplus

ProducersurplusProducersurplus

Before-taxsituation

Deadweight loss from an indirect taxDeadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

S + tax

Q2

P2

P2 tax

Deadweight loss from an indirect taxDeadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

S + tax

Q2

P2

11

22 3344

66

55P2 tax

Deadweight loss from an indirect taxDeadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

S + tax

Q2

P2

11

22 3344

66

55P2 tax

Deadweight loss from an indirect taxDeadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

S + tax

Q2

P2

11

22 3344

66

55P2 tax

Deadweight loss from an indirect taxDeadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

S + tax

Q2

P2

11

22 3344

66

55P2 tax

Tax revenuefor government

Deadweight loss from an indirect taxDeadweight loss from an indirect tax

O

S

£

Q

D

P1

Q1

S + tax

Q2

P2

11

22 3344

66

55P2 tax

Deadweightloss from tax

Deadweight loss from an indirect taxDeadweight loss from an indirect tax

• Changes in property rights– the problem of limited property rights

– extending property rights

– the Coase theorem

– limitations of this solution

• Legal controls– laws prohibiting behaviour that imposes

external costs

– laws to regulate monopoly power

– laws to prevent firms from exploiting people’s ignorance

• Changes in property rights– the problem of limited property rights

– extending property rights

– the Coase theorem

– limitations of this solution

• Legal controls– laws prohibiting behaviour that imposes

external costs

– laws to regulate monopoly power

– laws to prevent firms from exploiting people’s ignorance

FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION

• Regulatory bodies

• Price controls

– high minimum prices

– low maximum prices

• Provision of information

• The direct provision of goods and services

– providing public goods

– other goods

– making rational decisions

• Public ownership

• Regulatory bodies

• Price controls

– high minimum prices

– low maximum prices

• Provision of information

• The direct provision of goods and services

– providing public goods

– other goods

– making rational decisions

• Public ownership

FORMS OF GOVERNMENT INTERVENTIONFORMS OF GOVERNMENT INTERVENTION

Markets, Efficiency and the Public InterestMarkets, Efficiency and the Public Interest

Cost–Benefit AnalysisCost–Benefit Analysis

COST–BENEFIT ANALYSISCOST–BENEFIT ANALYSIS

• The procedure

• Identifying costs and benefits

– costs

• direct private monetary

• external monetary

• external non-monetary

– benefits

• direct private monetary

• private non-monetary

• The procedure

• Identifying costs and benefits

– costs

• direct private monetary

• external monetary

• external non-monetary

– benefits

• direct private monetary

• private non-monetary

O

D

50p

Q1

£

Q

Private non-monetary benefits (consumer surplus)Private non-monetary benefits (consumer surplus)

O

D

50p

Q1

£

Q

Consumersurplus

Consumersurplus

Private non-monetarybenefit

Private non-monetary benefits (consumer surplus)Private non-monetary benefits (consumer surplus)

COST–BENEFIT ANALYSISCOST–BENEFIT ANALYSIS

• The procedure

• Identifying costs and benefits

– costs

• direct private monetary

• external monetary

• external non-monetary

– benefits

• direct private monetary

• private non-monetary

• external

• The procedure

• Identifying costs and benefits

– costs

• direct private monetary

• external monetary

• external non-monetary

– benefits

• direct private monetary

• private non-monetary

• external

• Measuring costs and benefits

– direct private monetary costs and benefits

– non-monetary private benefits

– monetary externalities

– non-monetary externalities

• Risk and uncertainty

– sensitivity analysis

• Measuring costs and benefits

– direct private monetary costs and benefits

– non-monetary private benefits

– monetary externalities

– non-monetary externalities

• Risk and uncertainty

– sensitivity analysis

COST–BENEFIT ANALYSISCOST–BENEFIT ANALYSIS

• Discounting

– working out the NPV

– choosing the discount rate

• The distribution of costs and benefits

– the strict Pareto criterion

– the Hicks–Kaldor criterion

– taking specific account of redistributive consequences

• Discounting

– working out the NPV

– choosing the discount rate

• The distribution of costs and benefits

– the strict Pareto criterion

– the Hicks–Kaldor criterion

– taking specific account of redistributive consequences

COST–BENEFIT ANALYSISCOST–BENEFIT ANALYSIS

Markets, Efficiency and the Public InterestMarkets, Efficiency and the Public Interest

The Case for Laissez-FaireThe Case for Laissez-Faire

THE CASE FOR LAISSEZ-FAIRETHE CASE FOR LAISSEZ-FAIRE

• The growth of libertarian thinking– the neo-Austrian school and its influence on

radical-right thinking– libertarian policies of governments

• Drawbacks of government intervention– shortages and surpluses– poor information– bureaucracy and inefficiency– lack of market incentives– shifts in government policy– lack of freedom for the individual

• The growth of libertarian thinking– the neo-Austrian school and its influence on

radical-right thinking– libertarian policies of governments

• Drawbacks of government intervention– shortages and surpluses– poor information– bureaucracy and inefficiency– lack of market incentives– shifts in government policy– lack of freedom for the individual

• Advantages of the free market

– automatic adjustments

– dynamic advantages of capitalism

– high degree of competition even under monopoly/oligopoly

• Judging the arguments

• Advantages of the free market

– automatic adjustments

– dynamic advantages of capitalism

– high degree of competition even under monopoly/oligopoly

• Judging the arguments

THE CASE FOR LAISSEZ-FAIRETHE CASE FOR LAISSEZ-FAIRE