Government Policy and Market Failures Georgia State ….ppt

Government Policy and Market Failures Chapter 15 Introduction Should the government intervene in the market? The framework presented might be called the invisible hand framework. Invisible hand framework – perfectly competitive lead individuals to make voluntary choices that are in society’s interest. Market Failures A market failure occurs when the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes. Market Failures Any time a market failure exists, there is a reason for possible government intervention into markets to improve the outcome. Market Failures Because the politics of implementing the solution often leads to further problems, government intervention may not necessarily improve the situation. Externalities Externalities are the effect of a decision on a third party that is not taken into account by the decision-maker. Externalities can be both positive and negative. Externalities Negative externalities occur when the effect of a decision on others that is not taken into account by the decision-maker is detrimental to the third party. Externalities Positive externalities occur when the effect of a decision on others that is not taken into account by the decision-maker is beneficial to others. Negative Externalities When negative externalities ensue third parties are hurt. Marginal social cost is greater than marginal private cost. Negative Externalities Marginal social cost includes all the marginal costs borne by society. Negative Externalities Marginal social cost is calculated by adding the negative externalities associated with production to the marginal private costs of that production. The Effect of a Negative Externality Positive Externalities Private trades can benefit third parties not involved in the trade. Marginal social benefit equals the marginal private benefit of consuming a good or service plus the positive externalities resulting from consuming that good or service. A Positive Externali