CHAPTER 8 GOVERNMENT MICROECONOMIC

INTERVENTION PRESENTATION

Deadweight loss Refers to the loss of economic welfare

due to the desired consumption and production not
taking place ; loss of consumer and producer surplus

Allocative efficiency=

Deadweight loss under monopoly=

Government intervention to correct externalities :
 indirect taxes
 regulations
 property rights
 provision of information
 pollution permits
 Subsidies

Negative production externalities : Negative

production externalities are the side-effects of
production.
Government intervention:
1. Tax
2. Regulations
3. Pollution permits
4. Property rights

Negative consumption externalities : When certain

goods are consumed, such as demerit goods,
negative effects can arise on third parties.
Government intervention:
1. Legislation
2. Provision of information
3. Indirect taxation

Positive production externalities These are positive

externalities created due to production of certain
goods and services
Positive consumption externalities : Positive
consumption externalities occur when there is a
positive externality created by the consumption of
certain goods.

Nudge theory:
 Concept of choice architecture
 Way of achieving beneficial economic and social
outcomes without the need for regulations.
Eg: media campaign, free inoculation of a merit
good
However, this works only to a limited extent and
it's most effective when used alongside other
policies dealing with market failure

Privatisation : A transfer of ownership of the public

sector (the government) to the private sector (the
private owners)
Reasons:
 Efficiency
 X-inefficiency
 Easier to raise funds for investment
 Generates revenue for government
 Government makes slow and bureaucratic
decisions
 Government may run the business for political
reasons
However:
 May not make sense for several providers of,
say, railway lines (duplication --> inefficiency)
 Can lead to the formation of a private monopoly
 Regulations will be necessary to protect
consumers from being exploited
  Only take into account private costs and benefits
- Will not operate if it is loss making, even if it's
in the interest of the society
Equity : Fair distribution of, say, income or wealth
 Horizontal equity: consumers and others with
same circumstances should pay the same
amount of tax
 Vertical equity: taxes should be fairly
apportioned between the rich and the poor in
society

Wealth : An accumulated stock of assets that provide

an income stream for the future
Lorenz curve : A graphical representation of
inequality

Gini coefficient : A numerical measure of inequality

= Area A / (Area A + Area B)

Policies to redistribute income and wealth:

  Providing benefits: means-tested benefits (only
paid to those on low incomes - can create
poverty trap), universal benefits (available to all)
; solution: Negative income tax
 Tax system: use of progressive taxation
 Other policies: providing free services (eg:
health care and education), price stability
Wage theory : Demand: MRPL theory
Supply: individual, firm and long run supply of labour
Derived demand : Business demand that ultimately
comes from (derives from) the demand for consumer
goods.
Marginal revenue product of labour: the money value
of the addition to a firm's total output brought about by
employing one more worker

Demand theory :
Assumptions:
 firm operates in a PC
 firm aims to maximise profits
Criticisms:
 wages paid to all workers may not be the same
 firm may have other motives of production
 MRPL cannot accurately be calculated for services
 not all markets are perfectly competitive

Individual's supply of labour :Depends on monetary and

fringe factors and taxes and benefits.

Diagram:With high wages, individual's work less and

have more leisure time.Leisure is substituted for work
as the wage rate increases

Long run supply of labour is determined by :

 size of population
 tax and benefits
 immigration and emigration
 labour participation rate

Features of the labour market :

 The wage paid to the labour equals the value of the
marginal product of labour
  The willingness of labour to supply their services to
the labour market is dependent upon the wage rate
being offered
Transfer earnings : The amount a factor of production
can earn at its best alternative use.

The minimum amount that has to be paid to ensure that

a worker stays in his/her present job. If wages fall below
this level then he/she will transfer to alternative
employment

Economic rent : A payment made to a FOP (labour)

above that which is necessary to keep it in it's current
use (transfer earnings)
Trade unions : organisations formed by employees in an
industry, trade or occupation to represent them in
efforts to improve wages and the working conditions of
their members

Aims of trade unions:

  Increase wages
 Improve working conditons
 Maintain pay differentials between skilled and
unskilled workers
 Fight job losses
 Provide a safe working environment
 Secure additional working benefits
 Prevent unfair dismissals

Monopsony :
 Market with only one buyer of labour
 Imperfect market
 Price makers
Government failure : Government intervention that fails
to improve economic outcomes. It is a result of:
 Policy conflict (eg: taxes and subsidies)
 Undesirable incentives (eg: taxes, political power,
lack of incentives for nationalised firms)
 Imperfect information (eg: lack of information

about a negative externality, lack of information

about level of consumer demand)