Non-Market Failure Justifications for Government Intervention
I. Sources and Acceptability of Preferences
a) Exogenous preferences assumed by the market (i.e., people’s preferences for goods and service are fixed and generated outside of the market system)
b) Endogenous preferences (i.e., malleable and determined inside the market) – preferences are formed within market, there is no good measure of individual utility, and the notion of acting to maximize individual utility has no meaning.
Problem: If producers are able to tell consumers what they want, in what way are consumers rational actors in the free market? People will over-consume some goods and under consume others, to their detriment.
- Advertising regulation
- Regulate access to addictive substances
B. Acceptability of Preferences: For one reason or another, the society deems some preferences unacceptable
a) Moral Unacceptability: prostitution (supply or demand), drug use (supply or demand), dog fighting.
b) Risk Unacceptability: speeding, driving without insurance, most violent crimes (to avoid risks of anarchy and loss of order).
- Outlaw acting on preferences (criminalize behavior)
- Use sanctions and incentives in attempting to change preferences
II. Intertemporal Resource Allocation
1. Concept: Social rate of time preference, or “the discount rate.” Everybody values things more in present than in the future.
2. Problem: This means that market also values goods and services more in the present than in the future. Then in some point, saving both renewable and non-renewable resources for future generations makes no sense (forest, coral reefs, fish stocks, oil, species, etc.)
3. Government Responses: harvest limits, preserves, etc.
III. Efficiency v. Democracy
Sometimes the rules of decision making or the process of decisions are more important than the efficiency of the outcomes. As a society, we value government policies as much for how they are made as for what they do.
Criminal Justice System: ‘Innocent until Proven Guilty’ standard
- Very inefficient;
- Since most suspects are guilty, this doesn’t really improve public safety;
Public Participation in Administrative Decisions
- Very time consuming;
- Since bureaucrats are experts, unlikely that public input will improve quality of decision.
- What if benevolent dictator with very sophisticated public opinion polling apparatus could make decisions consistent with public preferences – would we want this?
IV. Preserving Human Dignity and Improving Equality of Outcomes
- Equal Access and Civil Rights
- Minimum Standards of Living
- Improving Equality of Outcomes: may even increase overall social welfare if the poor benefit more from these programs than the wealthy are distressed (i.e., if we assume a single social welfare function where small additions to welfare mean more to the poor than they do to the rich.