Market Failures and Government Intervention

<aside> 💯 The operative choice is not between an unhampered free-market economy and a fully centralized command economy.

It is rather the choice of which mix of markets and government intervention best suits people’s hopes and needs.

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The informal defence of free markets is based on 3 central arguments:

1. Free markets provide automatic coordination of the actions of decentralized decision makers
2. The pursuit of profits in free markets provide a stimulus to innovation and growth of material living standards
3. Free markets permit a decentralization of economic power

Market failures

The term market failure describes the failure of the market economy to achieve an efficient allocation of resources

Market power → it’s inevitable! Externalities → It occurs whenever actions taken by firms or consumers directly impose costs or confer benefits on others

Private cost → measures the cost faced by the private producer

Social cost → includes the private cost but also any other costs imposed on third parties

<aside> 💯 Discrepancies between private cost and social cost, or between private benefit and social benefit, occur when there are externalities. The presence of externalities, even when all markets are perfectly competitive, leads to allocatively inefficient outcomes

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<aside> 💯 With a positive externality, a competitive free market will produce too little of the good. With a negative externality, a competitive free market will produce too much of the good.

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Non-Rivalrous and Non-Excludable goods

• A good or service is said to be rivalrous if one person’s consumption means no one else can consume it