Download Economics 101 - Warwick Debating Society

“Economics 101”
-Is Government Intervention necessary in Markets?
Training Session 5 Mar 2014
• Why are Markets good?
• Problems in Markets
• Is Government Intervention beneficial?
Why are Markets good?
Why are Markets good?
• Markets are mechanisms through which
scarce resources are allocated.
• Free markets create equilibrium (that is
beneficial to all)
• Why equilibrium is good
Problems with Markets.
1. Externalities
• An externality is when I make a trade with
you, but it has some accidental effect on other
people who weren't involved in the trade.
(e.g. Environmental Damage)
• Is there a way to solve externalities without
Government Intervention?
– Possibly, but it is likely to be difficult
• Hard to boycott or have entire community action
• Often these problems are more wide spread than just
immediate area
2. Coordination Problems
• Coordination problems are cases in which everyone
agrees that a certain action would be best, but the
free market cannot coordinate them into taking that
action.
• A self-interested person has some incentive to sign a
pact to make everyone do something beneficial, but
in many cases has a stronger incentive to wait for
everyone else to sign such a pact but opt out himself.
This can lead to an undesirable equilibrium in which
no one will sign such a pact.
• Bargaining Power
3. Irrational Choices
• Old-school economics assumed choice to be
"revealed preference": an individual's choices will
invariably correspond to their preferences, and
imposing any other set of choices on them will
result in fewer preferences being satisfied.
• There is growing evidence from behavioral
economics that seemingly trivial alterations in the
way decisions are presented can substantially
affect choices.
• Should Governments protect people from
irrational choices?
4. Lack of Information
• In order for consumers to be able to make the right decisions,
they need to have perfect information about everything
• However, this clearly doesn’t happen in the real world. So,
Governments intervene to protect individuals by ensuring that
products are of a certain standard, and label how they work or
what went in to them.
• However, sometimes there are insurmountable cases of
information asymmetry (where one party has information, and
the other party doesn’t, and that information is very important
to the transaction).
• The two most interesting cases are moral hazard and adverse
selection, and something like health insurance gives a good
example of both.
Moral Hazard
• Moral hazard occurs when, by protecting an
individual against some bad outcome, it leads
to behaviour that actually may increase the
likelihood of that bad outcome occurring.
• If you have top notch health insurance, and
know you will be covered no matter what
happens, then you are likely to be less careful
with your health, meaning you may in fact be
more likely to get sick
5. Monopolies
• Monopolies are inefficient
• Can charge what they want when they have
control over the market
• Generally we don’t have debates about
monopolies or oligopolies, but the principles are
useful to consider – issues about market power
and relative competitiveness do come up in other
debates, particularly when considering labour
debates such as minimum wage, labour union or
right to strike debates.
Government Intervention
Government Intervention
• Inefficient
– Private sector faces competition and aims to
maximise profit
– Government has different incentives –
accountability that often leads to large amounts of
bureaucracy
• Lobbying
• Are market failures really market failures or
are they markets correcting itself?