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Chapter 5: The Public Sector

This document summarizes key concepts related to the public sector and market failures. It discusses the differences between technical and economic efficiency. While voluntary trade in markets can achieve economic efficiency under ideal conditions, market failures can occur due to imperfect information, externalities, public goods, lack of property rights, and monopolies. The document outlines various policy solutions governments employ to address these market failures, such as regulations, taxes, subsidies, and direct government provision of certain goods and services. It also discusses challenges like rent-seeking behavior that public choice theory suggests governments may face.

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Judz Sawadjaan
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257 views15 pages

Chapter 5: The Public Sector

This document summarizes key concepts related to the public sector and market failures. It discusses the differences between technical and economic efficiency. While voluntary trade in markets can achieve economic efficiency under ideal conditions, market failures can occur due to imperfect information, externalities, public goods, lack of property rights, and monopolies. The document outlines various policy solutions governments employ to address these market failures, such as regulations, taxes, subsidies, and direct government provision of certain goods and services. It also discusses challenges like rent-seeking behavior that public choice theory suggests governments may face.

Uploaded by

Judz Sawadjaan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Chapter 5: The Public Sector

Economic and technical efficiency

Technical efficiency no unemployed or underemployed resources (i.e., operating on PPC). Economic efficiency (also known as Pareto optimality) it is not possible to benefit one or more individuals without harming someone else Technical efficiency is a prerequisite for economic efficiency (but does not guarantee economic efficiency)

Markets and economic efficiency

voluntary trade in markets benefits each trading partner under ideal conditions, markets attain a state of economic efficiency (Pareto optimality)

Market failure

Markets may fail to achieve economic efficiency as a result of:


imperfect information externalities public goods the absence of property rights monopoly, or macroeconomic instability

Imperfect information

One party may not benefit from a market transaction if there is imperfect information about the item being sold Possible corrective action:

product labeling requirements (listing ingredients or including warnings) requiring guarantees (such as lemon laws) requiring truth in advertising licensing workers in certain professions providing public information about products

Externalities

Externalities are side effects of production or consumption that affect individuals not directly involved in the activity or transaction Positive externalities occur when one or more parties not involved in the transaction benefit from the activity Negative externalities occur when third parties are harmed.

Positive externalities

Those engaged in the transaction do not take the external benefits into account in their decision making This results in underproduction Possible remedies:

subsidy regulation

Negative externalities

Negative externalities result in social costs that are not borne by the parties involved in the transaction. results in overproduction Possible solutions:

taxation regulation

Internalizing externalities

The use of taxes or subsidies to correct for an externality is sometimes referred to as internalizing the externality.

Public goods

nonrival in consumption (one persons consumption does not affect the quantity or the quality of the good available to others) free-rider problem results in underproduction Possible solutions: government production or subsidization

Common property resources

problem of the commons - resources are commonly owned

benefits are received by those who use the resource costs are shared by all

overutilization government regulation

Monopolies

higher prices and lower output antitrust law, regulation, or public production

Macroeconomic instability

economic inefficiency caused by unemployment during recessions government policies designed to stabilize the economy

Public choice theory

government policy is constructed by selfinterested individuals participants in policy formation are concerned about their own self interest, not the public interest economic rent - a payment in excess of opportunity costs rent-seeking behavior on the part of specialinterest groups

Economic policy

Microeconomic policy - designed to correct for:

imperfect information, externalities, public goods, the absence of property rights, and monopolies.

Macroeconomic policy - designed to enhance macroeconomic stability and encourage economic growth.

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