• Unit 8: The Role of the Government in a Market Economy

    In this unit, we delve into how government intervention can address market failures, such as the existence of public goods, externalities, and income and wealth inequality. We analyze decision-making in the public sector, comparing public interest theory with public choice theory. Finally, we explore the Coase Theorem to determine whether private bargaining is preferable to government intervention when dealing with external effects.

    Completing this unit should take you approximately 3 hours.

    • 8.1: Public Goods

      We introduced public goods in Unit 4 when we talked about market failures. Public goods have two fundamental characteristics: non-excludability and non-rivalry. Non-excludability means it is difficult, or even impossible, to prevent individuals from using the good. In simpler terms, if a public good is available, everyone can enjoy its advantages, and it is challenging to prevent anyone from accessing it. Non-rivalry implies the consumption of the good by one person does not reduce its availability or usability for others.

      What is the public good? Read this text on public choice theory and how rational voters conduct cost-benefit analyses of public issues. The theory of rational ignorance says that people will not vote if the costs of becoming informed and voting are too high or if they do not feel their vote will make a difference. However, a smaller group of voters may not elect candidates that enact policies to benefit the entire population.

    • 8.2: Government Revenue and Expenditures

      According to De Mooij and Keen, it is difficult to come up with anything that has not been taxed at some point in history. Items like playing cards, urine, fireplaces, slaves, religious minorities, and windows all found themselves under the scrutiny of tax collectors. (Ruud De Mooij and Michael Keen. Taxing Principles Making the Best of a Necessary Evil. Finance and Development, 2014).

      In this section, we examine both sides of the government budget – revenue and spending – as tools to solve market failures.

    • 8.3: Choices in the Public Sector

      How are choices made in the public sector? This section briefly examines two competing perspectives on public sector choice. The first is driven by examining market failure. Choices in the public sector involve locating problems of market failure, determining efficient solutions, and finding ways to make the solutions work. This approach – the public interest theory of government – assumes that the goal of public policy is to allocate resources efficiently.

      A more cynical person might disagree. An alternative approach considers public sector choices in the same way as we do in the private sector. Public choice theory assumes individuals only make choices to maximize their own utility – whether they are voters, politicians, or bureaucrats, these individuals seek solutions that align with their self-interest. Business owners may try to influence public sector choices to increase their profits. The effort to influence public policy choices to advance your own self-interest is called rent-seeking behavior.

    • 8.4: Private Bargaining vs. Government Intervention

      In October 2023, the first chapter of the latest open textbook on microeconomics is "Prosperity, Inequality, and Planetary Limits." Its introduction features a striking image of a massive bushfire raging out of control. These bushfires have become a common sight for many of us. This raises the question of whether inequality and environmental issues are private or public matters.

      In this section, we introduce the Coase theorem, which posits that private bargaining can address market failures. In some cases, these actions are more effective than government policies.

    • Unit 8 Assessment

      • Receive a grade