英文版微观经济学复习提纲Chapter 14. Government intervention in the market.pdfVIP

14 Government Intervention in the Market Chapter Summary The government plays a significant role in any economy. Although competitive private markets provide the best mechanism for allocating society’s resources, there are occasions when government’s need to intervene in these markets. For example, governments are required to enforce the rule of law, particularly over contract and property rights, or to overcome externalities. However, whilst government intervention is sometimes necessary, there are also situations where government intervention occurs, but is not required. For example, the private interest view states that politicians can sometimes intervene in markets largely because of the rent-seeking claims of a small group of individuals or firms. This type of intervention leads to government failure, as the net result to the overall economy is often a loss of efficiency. The difficulty in correctly pricing insurance policies stems from asymmetric information, which happens when one party to a transaction has less information than the other party. Asymmetric information is also present in the market for used cars. Asymmetric information leads to adverse selection. Adverse selection occurs when one party to a transaction takes advantage of knowing more than the other party. The insurance industry is also subject to moral hazard, which is the tendency of people to change their actions because they have insurance. Insurance companies use deductibles and co-payments to reduce moral hazard. Adverse selection and moral hazard also affect firms and investors in financial markets. When a firm has sold stocks and bonds it may spend the funds in ways not in the owners’ best interests. Since the owners of the firm’s stock also own the firm itself, this can be a major problem. Moral hazard can also