Fundamentals of Economics. Доловова Н.Н - 29 стр.

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29
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LESSON 7
Principle #7: Governments Can Sometimes Improve Market
Outcomes
Although markets are usually a good way to organize economic activity, this
rule has some important exceptions. There are two broad reasons for a government to
intervene in the economy: to promote efficiency and to promote equity. That is, most
policies aim either to enlarge the economic pie or to change how the pie is divided.
The invisible hand usually leads markets to allocate resources efficiently.
Nonetheless, for various reasons, the invisible hand sometimes does not work.
Economists use the term “market failure” to refer to a situation in which the market
on its own fails to allocate resources efficiently.
One possible cause of market failure is an externality. An externality is the
impact of one person's actions on the well-being of a bystander. Pollution is the
classic example. If a chemical factory does not bear the entire cost of the smoke it
emits, it will likely emit too much. In this case, the government can raise economic
well-being through environmental regulation.
Another possible cause of market failure is market power. Market power refers
to the ability of a single person (or small group of people) to unduly influence market
prices. For example, suppose that everyone in town needs water but there is only one
well. The owner of the well has market power—in this case a monopoly—over the
sale of water. The well owner is not subject to the rigorous competition with which
the invisible hand normally keeps self-interest in check. You will learn that, in this
case, regulating the price that the monopolist charges can potentially enhance
economic efficiency.
The invis ible hand is even less able to ensure that economic prosperity is
distributed fairly. A market economy rewards people according to their ability to
produce things that other people are willing to pay for. The world's best basketball
player earns more than the world's best chess player simply because people are
willing to pay more to see basketball than chess. The invisible hand does not ensure
that everyone has sufficient food, decent clothing, and adequate health care. A goal of
many public policies, such as the income tax and the welfare system, is to achieve a
more equitable distribution of economic well-being.
To say that the government can improve on market outcomes at times does not
mean that it always will. Public policy is made not by angels but by a political
process that is far from perfect. Sometimes policies are designed simply to reward the
politically powerful. Sometimes they are made by well-intentioned leaders who are
not fully informed. One goal of the study of economics is to help you judge when a
government policy is justifiable to promote efficiency or equity and when it is not.

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