10.0 The Microeconomy and the Government. 10.1.1 Milton Friedman – 1962 -Capitalism and Freedom...
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Transcript of 10.0 The Microeconomy and the Government. 10.1.1 Milton Friedman – 1962 -Capitalism and Freedom...
10.0 The Microeconomy and the Government
10.1.1
Milton Friedman –1962 -Capitalism and Freedom
Potential roles for governmentEnsuring commutative justice – making sure there
are fair rules for the game
Dealing with market power
Dealing with market failure
Plus, what about equity?
10.1.2
Two underlying questions about policy debates
Does economy need help from the gov’t?
Is government intervention part of the solution or a bigger problem unto itself?
10.2.1-10.2.2
Solving externality problems
All you have to do is figure out the marginal external cost, and impose that cost on the private actor
This is called internalizing the externality
Government might choose to
Tax equal to MEC
Limit ouput – no more beyond Ls
Require firms to install scrubbers –reducing MEC
Much easier said than done
Tough to measure MEC
Have to make an educated guess – a proxy
Plus, if there are strict rules, firms may move elsewhere
10.2.3
Market power in labor disputes
Adam Smith – owner may have an advantage over workers
There are fewer, and it is easier for them to collude
10.3.1
Every government has an economic policy
Even if it chooses to not get involved at all,
That is a choice
Sometimes the policies are not the most thoughtful ones
Assume your objectives are
Pareto optimality and equity
Questions to ask:
How well do you think the market system works?
How realistic are the nice assumptions?
How much do you trust government to effectively carry out policy?
Further,
Does gov’t simply become a tool to create or enhance market power?
Can it be a source of constructive solutions, or
Is it a rent-seeking/rent-maintenance structure that must be constrained?
If the web of connections is
so complicated, is wise policy even possible?
Decent, intelligent people disagree on the answers to these questions
10.3.2 Two extreme positions
Laissez-faire – leave markets alone – non-intervention
People who believe in the nice assumptions often espouse this
Intervention – governments can and should get involved to fix problems that arise with the market system
10.4 Distributive Justice
10.4.1
Problems of definition –
tough to get people to agree on a definition of equity
Gov’t can intervene through taxes, spending on various programs, etc.
10.4.2
Problems of implementation
Even if you can reach a consensus on equity,
the policy may have some unexpected effects
Ex. Rent Control-
Shortage becomes a long-term problem
Figure 10.4.1 - Rent Control Case
RENT
Q
Rc
0
Re
D
S
10.4.3
Are equity and efficiency invariably a trade-off?
Not if redistribution of endowments can occur
Most often, interventions in the name of equity occur on an ad hoc (case by case) basis,
and contain many efficiency issues
10.4.4
Do all these problems mean laissez-faire is the way to go?
Not necessarily, but coherent, constructive policy is a challenge
Debate remains over
How well the market economy works,
How well the government works,
and how fair the status quo is
Social and political competition revolves around
these questions
Sometimes it is peaceful, sometimes not,
and sometimes played out both ways
10.5 ReviewStarted with R.C. – individual choice in isolationMoved to complexity, division of labor, and exchangeThen, markets under perfect competition and nice
assumptions – Pareto optimalityRelaxed assumptions - introduced market power and
market failureLastly, examined role of government – laissez-faire vs.
intervention