Chapter 5: The Economic Role of Government
TEXTBOOK Reading Assignment: MindTap Textbook Chapter 5
Chapter Learning Tools
WHAT TO LEARN: Chapter 5 OUTLINE
I. A Closer Look at Economic Efficiency
A. Economists often use the concept of efficiency to judge actions because the efficient use of resources implies the maximum value of output from the resource base.
B. Two conditions are necessary for ideal economic efficiency:
1. All activities that provide individuals with more benefits than costs must be undertaken.
2. No activities that provide benefits less than costs should be undertaken.
II. If It’s Worth Doing, It’s Worth Doing Imperfectly
A. Although perfection is a noble goal, it is rarely worth achieving because additional time and resources devoted to an activity generally yield smaller and smaller benefits and cost more and more.
B. Inefficiency can result when either too little or too much effort is put into an activity.
III. Thinking About the Economic Role of Government
A. Protective Function of Government: The most fundamental function of government is the protection of individuals and their property against acts of aggression.
1. Involves the maintenance of a legal structure (rules) within which people interact peacefully and have a process for the settlement of disputes.
B. Productive function of Government
1. Involves the provision of a limited set of goods that are difficult to supply through the market.
IV. Potential Shortcomings of The Market
A. There are four major reasons why the invisible hand may fail to allocate resources efficiently: (1) Lack of competition, (2) Externalities, (3) Public goods, and (4) Poor information.
1. Lack of Competition: Sellers may gain by restricting output and raising price. Too few units will be produced.
2. Externalities—the failure to fully register costs and benefits.
3. Public Goods
4. Problems Arising from Poor Information
V. Market Failure and Government Failure
A. Market Failure
1. Market failure is the term used to describe the failure of markets to achieve the ideal conditions of economic efficiency.
2. When markets allocate goods inefficiently, the problem can generally be traced back to the absence of competition, externalities, public goods, or poor information
B. Government Failure
1. Government failure is the term used to describe the situation when there is reason to anticipate that political decision-making will fail to achieve the ideal conditions of economic efficiency.
2. Government action directed by political decision-making is merely an alternative form of economic organization. It is not a corrective device that can be counted on to provide a remedy for the shortcomings of markets.
3. Merely because market failure is present, it does not follow that political action will necessarily lead to a more efficient allocation of resources.