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Economic-Rationale-for-Public-Sector-Interventions .pptx

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Economic-Rationale-for-Public-Sector-Interventions .pptx

  1. 1. Economic Rationale For Public Sector Interventions: Market Efficiency And Market Failure, Distributional Concerns Professor: Florentino Siladan, MPA PA-508 Public Fiscal and Administration
  2. 2. At the end of the report we will be able to: Objectives of the report 1. Know what are the Economic Rationale for Public Sector Interventions a. Marketing Efficiency b. Distributional Concerns
  3. 3. Opening Prayer
  4. 4. Group 2 Members Rica Marie Adrada Richelle Vista Lito Emmanuel Dele- onio
  5. 5. Definition of Terms refers to the degree to which market prices reflect all available, relevant information Economic Rationale the reasons or thought processes that impact economic decisions Market efficiency/Economic Efficiency Public Sector part of an economy that is controlled by the government Market Failure economic situation defined by an inefficient distribution of goods and services in the free market 1 3 2 4
  6. 6. Economic Rationale for Public Sector Interventions WHEN do Public Sector Intervenes in the economy? ● If markets are not efficient and when the intervention would improve efficiency. ● Has two conditions: 1. First condition for public sector intervention is evidence that a market failure exists 2. Second condition is that the intervention will make an improvement.
  7. 7. Economic Rationale for Public Sector Interventions
  8. 8. ● Maximizing social welfare is one of the most common and best understood reasons for government intervention. ● Governments may sometimes intervene in markets to promote other goals, such as national unity and advancement. Economic Rationale for Public Sector Interventions ● The government tries to combat market inequities through regulation, taxation, and subsidies. ● Governments may also intervene in markets to promote general economic fairness. Why should the public sector intervene in the economy?
  9. 9. MARKET EFFICIENCY AND MARKET FAILURE
  10. 10. MARKET EFFICIENCY
  11. 11. MARKET EFFICIENCY refers to the degree to which market prices reflect all available, relevant information refers to how well current prices reflect all available, relevant information about the actual value of the underlying assets
  12. 12. MARKET FAILURE
  13. 13. MARKET FAILURE occurs when there is an inefficient allocation of resources, In other words, the true cost of a good is not reflected in the price is the economic situation defined by an inefficient distribution of goods and services in the free market
  14. 14. Why should the public sector intervene in the economy? Public Goods Externalities or Spill-overs Imperfect Information Imperfect Competition Four Common Causes of Market Failure:
  15. 15. o a commodity or service that is made available to all members of a society Public Goods
  16. 16. Public Goods Has two characteristics: 1. Non-excludable goods - It is impossible to restrict consumption of the good just to those who pay for it • Example: street lights • Free rider- once one person chooses to consume the good or service, other consumers are able to ‘free-ride’ on this decision and consume the same product for free (fireworks display) 2. Non-rival goods - one person’s consumption of a good does not prevent anyone else from consuming it. • Example: national defense
  17. 17. Public Goods
  18. 18. Externalities or Spill- overs o describes a cost or benefit resulting from an economic transaction that is borne or received by parties not directly involved in the transaction. Example: pollution
  19. 19. Externalities or Spill- overs Types of Externalities 1. Negative externality – occurs where an activity or transaction imposes an external cost to others not involved in the activity or transaction 2. Positive externality - exists when there are benefits to parties not involved in the transaction
  20. 20. definition of property rights and a mechanism for the enforcement of those rights when there are so many parties involved in the transaction that the costs of negotiation are too high i.e., where there is coordination failure Negotiation & Property Rights Co-ordination Externalities or Spill- overs Dealing with the externalities problem Through merger of the parties involved so that one new larger party
  21. 21. Asymmetric Information Adverse Selection the consumer has much better information than the provider (insurance) the seller of a good or service has more information than the buyer on the quality of the good or service for sale (used cars) Imperfect Information Moral Hazard exists when one of the parties to an agreement has an incentive, after the agreement is made, to act in a manner that brings additional benefits to himself or herself at the expense of the other party
  22. 22. usually occurs where there are not a sufficiently large number of suppliers in a market, there no longer exists sufficient competitive pressure on the suppliers to ensure that they set prices at an economically efficient level Imperfect Competition
  23. 23. where there is just one provider of a good or service and is the most extreme example of where a market is likely to lack competition where there are only a small number of suppliers, there is a possibility that full competition can be impeded, resulting in an inefficient market outcome Monopoly Oligopoly Imperfect Competition
  24. 24. DISTRIBUTIONAL CONCERNS/ EQUITY CONSIDERATIONS Equity Grounds Market
  25. 25. Interventions on equity grounds occur because elected politicians have a mandate from the electorate to intervene in markets for social or equity reasons DISTRIBUTIONAL CONCERNS/ EQUITY CONSIDERATIONS
  26. 26. DISTRIBUTIONAL CONCERNS/ EQUITY CONSIDERATIONS Such interventions are based on the subjective decisions and judgements of democratically accountable politicians but a market failure framework should still be used to consider the potential consequences of the intervention and to ensure the desired outcome is achieved in the most efficient and effective way
  27. 27. 4 Factors Influencing Local Government Financial Decisions Political (Citizen) Involvement feedback from citizens and citizen involvement Social & Demographic Change population change, age distribution, and personal income Economic Influence recessions and expansions, inflation and changes in interest rates, competition for business investment and residents Legal & Intergovernmental Matters requirements for budgetary balance and mandates
  28. 28. Risk of Intervention Factors that may mean that a public sector intervention is not effective: lacking knowledge or information as to a particular subject or fact Crowding Out Competing with everybody else in the economy that results in decrease of private investment and increase of interest rate Substitution/Income Effects when the price of a good decreases, consumers will substitute away from goods that are relatively more expensive to the cheaper good Political and administrative failings unable to achieve political and administrative chosen purpose or complete political administration Lack of Information
  29. 29. o Improve the distribution of market outcomes between rich and poor, for example through taxes and income support – vertical equity; o Ensure people in similar circumstances are treated equally, for example have equal access to services – horizontal equity; or to, o Consider the needs and outcomes for future generations, for example ensure that future generations are not made worse off by the activities of the present generation Public sector intervention to improve equity or distributional outcomes may be to:
  30. 30. Thank You!

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