Why does the government need to get involved with externalities to bring about market efficiency

For example, your third sports car gives only a small increase in total utility. This leads to a decline in social welfare. However, others argue there is a strong case for government intervention in different fields.

The free market does not provide the most socially efficient outcome, if there are externalities in consumption and production. Arguments against government intervention Governments liable to make the wrong decisions — influenced by political pressure groups, they spend on inefficient projects which lead to an inefficient outcome.

High transaction costs and problems related to uncertainty are other obstacles that prevent parties involved in technical externalities from internalizing costs and benefits through bargaining solutions.

Arguments for government intervention Greater equality — redistribute income and wealth to improve equality of opportunity and equality of outcome. In a free market, provision tends to be patchy and unequal.

Should the government intervene in the economy?

In a free market, inequality can be created, not through ability and handwork, but privilege and monopoly power. In fact, the well-known moral hazard is a form of externality in which decision makers maximize their benefits while inflicting damage on others but do not bear the consequences because, for example, there is uncertainty or incomplete information about who is responsible for damages or contract restrictions.

Such a tax would yield the market outcome that would have prevailed with adequate internalization of all costs by polluters.

There are also positive externalities, and here the issue is the difference between private and social gains. As long as the increase in rents is greater than the payment to the polluter, the outcome is beneficial for the landlord. As a result, households and firms do not place enough value on these public goods, and efficient market outcomes through bargaining typically are not feasible.

In other words, environmental issues often face a collective action problem. In a free market, public goods such as law and order and national defence would not be provided because there is no fiscal incentive to provide goods with a free rider problem you can enjoy without paying them.

The atmospheric accumulation of greenhouse gases from human activity has been identified as a major cause of global warming. Clean air, clean water, biodiversity, and a sustainable stock of fish in the open sea are largely nonrival and nonexcludable goods.

Some economists argued that market mechanisms can correct for the externalities and provide for efficient outcomes. Government intervention to overcome market failure 1. Should the government intervene in the economy?

Tejvan Pettinger economics One of the main issues in economics is the extent to which the government should intervene in the economy. Since the indirect costs are not borne by the producer, and therefore not passed on to the end user of the goods produced by the polluter, the social or total costs of production are larger than the private costs.

The resulting wedges between social and private costs or returns lead to inefficient market outcomes.

Identifying and agreeing on policies for internalization of the social costs of GHG emissions at the global level are extremely difficult, given the cost to some individuals and firms and the difficulties of global enforcement of such policies Tirole, The indirect costs include decreased quality of life, say in the case of a home owner near a smokestack; higher health care costs; and forgone production opportunities, for example, when pollution harms activities such as tourism.

Often the argument is made that people should be able to keep the rewards of their hard work. Government intervention is taking away individuals decision on how to spend and act.

Externalities are among the main reasons governments intervene in the economic sphere. Free market economists argue that government intervention should be strictly limited as government intervention tends to cause an inefficient allocation of resources.

Similarly, as long as the payment exceeds the loss in profit from lower pollution lower productionthe polluter is better off as well. Such contractual bargaining can be mutually beneficial. Therefore, to provide public goods like lighthouses, police, roads, e.

For example, a landlord and a polluter could enter into a contract in which the landlord agrees to pay the polluter a certain amount of money in exchange for a specific reduction in the amount of pollution.Why does the government need to get involved with externalities to bring about market efficiency?

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What solutions need to be provided for your examples? Guided Response: Review the discussion board posts of your classmates%(36). The proposition that technical externalities require government regulation and taxation to prevent less-than-optimal market outcomes was intensely debated after Pigou’s seminal work.

Some economists argued that market mechanisms can correct for the externalities and provide for efficient outcomes. Explain the difference between a positive and negative externality.

In your analysis, make sure to provide an example of each type of externality. Why does the government need to get involved with externalities to bring about market efficiency?

What solutions need to be provided for your examples? Guided Response: Review the discussion board posts of. Externalities Explain the difference between a positive and negative externality. In your analysis, make sure to provide an example of each type of externality.

Why does the government need to get involved with externalities to bring about market efficiency?94%(52). This is a summary of whether should the government intervene in the economy. Negative externalities. The free market does not provide the most socially efficient outcome, if there are externalities in consumption and production.

Similarly, the government may need to prevent an economic boom and explosion of credit. Why Does The Government Need To Get Involved With Externalities To Bring About Market Efficiency Topic: If the market is so great, why do we need governmentDiscuss.

Support your arguement with suitable examples and evidences. Market is often known as physical places, such as supermarket or shopping mall .

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Why does the government need to get involved with externalities to bring about market efficiency
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