II. SOURCES OF MARKET FAILURE

E. Merit goods & the unacceptability of Individual Preferences 1. Religious and humanist impulses 2. Aesthetic, artistic 3. Criminal justice F. The Production of Public goods & Private goods 1. Excludability 2. Non-rivalry 3. Pure Private goods - excludable and rivalrous 4. Private goods with negative externalities 5. Toll goods - excludable but nonrivalrous 6. Common pool resources - nonexcludable but rivalrous 7. Pure Public Goods - nonexcludable & nonrivalrous

Conditions that are needed to be met in order to produce market efficiency: 1) Property rights need to be defined and secured. a. Complexity of property rights b. This facilitates trust and then trade c. How is this done? - Private enforcement (mob, etc.) - Public enforcement (Government) -common law -statutory law -enforcement of contracts -planning and zoning -war

2) information regarding goods and services (and alternatives) is readily available and widely shared 3) the number of producers and/or consumers is sufficiently large to prevent any individual producer or consumer from exercising identifiable control over prices or supply (microsoft, kellogs, etc.) 4) transactions for various goods and services affect only those who produce them. (no positive or negative externalities). 5) related excludability (those who do not pay for a given good or service are prevented from receiving any utility from the production or consumption of that good or service. No free riders 6) transaction costs are relatively low (relates to #1). Uncertainty in the private sphere produces transaction costs. PE think good public policy should try and lower the transaction costs of market interactions. (note: private attempts to lowering transactions costs - insurance).

V. GROWTH IN GOVERNMENT: The Demand for Regulation/Incentives I. Introduction: While there are logical rationales for regulation, there is also a political dynamic involved, based on the motivation that individuals have because of the distribution of costs/benefits A. It is people promoting or resisting policy that actually affects the scope of government. Government grows for a reason, usually in response to demands. But by who?

B. There are other things that affect who promotes or resists: 1. Formal institutions: access to government 2. Political participation: eligibility requirements, etc. 3. Distribution of political resources: prestige, skill, money

MANAGING GOVERNMENT FAILURE Political Economy Approach What determines government choices? Rational Individuals responding to institutional rules

Policy Actors What they should do What they can do What they want to do What they need to do

Why do policy actors act the way they do? Because they are evil? Because they are self-interested Responding to Incentives Responding to Constraints What are the incentives and constraints that policy actors face?

Government oversees the Market but who oversees the government? Interest groups Other government agencies: separation of powers Institutional rules that provide incentives to act in an appropriate way: sunshine laws; campaign finance laws, etc. Voters: Leadership Selection Process

Who are the policy leaders? Public Officials Executive Legislators Bureaucracy Private Actors Interest Groups Voters

Institutions that Influence Behavior –Structure of Power Parliamentary/Presidential Checks and Balances Federalism –Elections Frequency Geographic boundaries