The Individual, The Government, and Mixed Markets Limited Government

“If we can save just one life, then policy X is worth it.” If a policy is going to save a life should government create it?

Trade offs- decision that involves giving up something to gain something else. Marginal Costs- Additional Costs Marginal Benefits- Additional Benefits Private Costs and Private Benefits- costs only on the individual External Costs and Benefits- additional costs and benefits on 3 rd parties Social Costs = Private Costs + External Costs Social Benefits = Private Benefits + External Benefits

When marginal benefits exceed marginal costs people will have the incentive to continue what they are doing When marginal costs exceed marginal benefits People will have the incentive stop what they are doing. One role of government – is to change the incentives, by changing costs and benefits.

There are no “right” or “wrong” solutions, there are only trade-offs. - Harold Winter

“If we can save just one life, then policy X is worth it.” If a policy is going to save a life should government create it? When should the government create policy?

Complete Survey Be prepared to discuss your positions. Human continuum with group discussion and debate.

Essential Questions Unit 3 1.To what extent are the concepts of private ownership of property and free trade essential for free markets? 2.How much do different perspectives on fairness, equality, morality, and value impact market outcomes? 3.To what degree can you influence markets both as a buyer and as a seller? How free are we in free markets? Why should you care? 4.To what extent are individuals motivated by profit and loss? How much do government policies impact individual decision making? 5.How well do markets coordinate individuals? Why are there different outcomes for different individuals and is this acceptable? How Individuals interact (Others) 6.Is self-interest good for free markets? To what extent do markets force people to consider others? In what ways may government intervention redirect self-interest? 7.Do mixed markets promote selfishness or unselfishness? 8.To what extent is our mixed markets still based on the concept of voluntary exchange? 9.Who coordinates best? What is the proper role of government in markets? To what extent can the government impact market forces? What system best allocates resources to improve standards of living? 10. How well do markets prevent concentrations of power? How well does government prevent economic concentrations of power? 11.To what extent do you agree with the quote, “There is no such thing as a free government program.” 12.Why is it important to recognize the seen and unseen outcomes of decisions? To what extent should costs and benefits be equally shared amongst individuals in society? 13. Do mixed markets promote free choice, accurate information, and appropriate responses to feedback? 14.To what extent do markets force participants to respond to feedback? To what extent is our economic system open or closed system? How much does the government open or close our economic system? Is government part of the system or the surrondings? 15.To what extent do free markets and government create and remove barriers?

3.9 Who coordinates best? What is the proper role of government in markets? To what extent can the government impact market forces? What system best allocates resources to improve standards of living?

All resources are scarce And will be rationed (allocated) The 2 questions that need to be answered are: Who will do the rationing? And How will they ration? Consider feedback loops

What if there were no minimum wage laws? What if there were no anti-trust (anti-monopoly) laws? What if there were no pollution laws? What would happen if there were no lemon laws? Answer the following questions.

What if there were no minimum wage laws? What if there were no anti-trust (anti-monopoly) laws? What if there were no pollution laws? What would happen if there were no lemon laws? Answer the following questions but base your response on what you feel an advocate of the free market would say. Repeat for an advocate of stronger government involvement. Are these concerns real or are they Boogie man Economics?

The Proper Role of Government is debatable and can vary over time and circumstances. It cannot be taught. But you need to understand the following truths: 1.In Mixed Market economies people in Government WILL play a role. 2.Decisions made by people in Government WILL have an impact.

Equilibrium The state in which the Quantity Demanded equals the Quantity Supplied. Or The state in which Benefits equal the Costs. Efficiency is a goal of every economic system. Pareto Optimality is achieved when it is impossible to make one person better off without making someone worse off.

Failure (Disequilibrium) The state in which the Quantity Demanded does not equal the Quantity Supplied. Or The state in which Benefits do not equal the Costs. Too much or too little is being produced. Inefficiency

Common Examples of Failure 1.Imperfect Information 2.Imperfect Competition 3.Externalities (external costs and external benefits) aka Neighborhood Effects 4. Free Riding 5.Agent Principal dilemma The principal–agent problem occurs when one person or entity (the "agent") is able to make decisions that impact, or on behalf of, another person or entity: the "principal". The dilemma exists because sometimes the agent is motivated to act in his own best interests rather than those of the principal. The agent-principal relationship is a useful analytic tool in political science and economics, but may also apply to other areas. 6.Missing Markets (Public Goods)

Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient. In other words, when market forces (self interest outside of government) result in misallocation of resources or disequilibrium. Market failure is often seen as a reason for the government to get involved. Examples: Solving for externalities provide public goods breaking up monopolies market forces result in misallocation of resources Why does competition make Market failure less common than might be believed?

If the Government is going to get involved to fix a market failure it should at least answer 3 questions: 1.On what basis should the government get involved: Is there evidence of a serious market failure to correct? 2.Is the government involvement improving the situation or making it worse? Do the benefits of involvement outweigh the costs? 3.Is the government policy optimal: Is it efficiently correcting the market and maximizing economic welfare? Or is policy worse than the problem? If the answers are no- we get Government failure.

Government failure- when government forces (self interest inside of government) usually in attempt to solve market failures result in misallocations of resources and disequilibrium. People produce when they shouldn’t or are not producing when they should. “There's a smokestack on the back of every government program.” - Milton Friedman market forces result in misallocation of resources

Redistribution Policies- are not Pareto optimal (not intended to be) Reduction of poverty Fairness in labor markets Providing merit goods Merit goods- entitlement programs – such as education, healthcare, housing etc.

System of limited Government Private Property Freedom of Enterprise and Choice Motive of Self Interest System of Markets and Prices Competition Economic Powers of Government

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. Nothing happens in isolation Look at the seen and the unseen cost

Headline Economic Role being fulfilled by Government Congressional Economic Power Tradeoff Cost Benefits Consumer Product Safety Commission Recall of Skirts Made in India Free Market Principle President wants federal minimum wage to increase to $10.10 US Investigation Seeks to Find if Aluminum Producers Conspired to Cut Output, Broke Anti-Trust Laws Pa’ Petition for Tighter Curbs on Auto Emissions Approved by Environmental Protection Agency Congress Approves Higher Income Tax Rate for Top Wage Earners

"The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.“ -John Stuart Mill Agree or Disagree? What are some different ways that a person can harm another? Do market failures cause harm?

1.In Mixed Market economies people in Government WILL play a role. 2.Decisions made by people in Government WILL have an impact. Pareto Optimality is achieved when it is impossible to make one person better off without making someone worse off. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient. In other words, when market forces (self interest outside of government) result in misallocation of resources or disequilibrium Government failure- when government forces (self interest inside of government) usually in attempt to solve market failures result in misallocations of resources and disequilibrium. If the Government is going to get involved to fix a market failure it should at least answer 3 questions: 1.On what basis should the government get involved: Is there evidence of a serious market failure to correct? 2.Is the government involvement improving the situation or making it worse? Do the benefits of involvement outweigh the costs? 3.Is the government policy optimal: Is it efficiently correcting the market and maximizing economic welfare? Or is policy worse than the problem? There are no “right” or “wrong” solutions, there are only trade-offs. Redistribution Policies- are not Pareto optimal (not intended to be)