This assignment discusses the normative governmental intervention in the market. The aim is to decide if the government should intervene or not. Before deciding to intervene, two different economic views will be introducing shortly, the invisible hand by Adam Smith and the Keynesian approach, which will be follow up in this assignment.
The first step is to describe the market with its impacts, demand and supply and how these two impacts arise. After this the market efficiency and market failure will be elucidate by negative and positive externalities. Other influence like public goods or common resources will not be describe, because this would blow the frame of this assignment.
After define the principles, the government intervention will be discuss. There are different ways, which will be demonstrated. These are command-and-control policies like regulation, market-based policies like corrective tax and subsidies and tradable pollution permits.
These opportunities will be accompanied by examples to clarify them show their pros and cons.
At least the conclusion with the résumé of the assignment follows with an integrated ITM-checklist.
Table of Contents
1 Introduction
2 Market
2.1 Demand and Supply
2.2 Market Efficiency and Market Failure
3 Governments Intervention
3.1 Regulation
3.2 Corrective Taxes and Subsidies
3.3 Tradable Pollution Permits
4 Conclusion
Objectives and Core Topics
The primary objective of this assignment is to evaluate the normative role of government intervention in market economies, specifically examining whether such intervention is economically justified. The paper explores the dichotomy between the "invisible hand" concept and Keynesian theory, focusing on how governments can address market failures, particularly in the presence of externalities.
- Theoretical foundations: Adam Smith's "invisible hand" vs. Keynesian economic policy.
- Market mechanics: Analysis of supply, demand, and market equilibrium.
- Market failure: Examination of externalities and their impact on resource allocation.
- Policy tools: Comparison of command-and-control regulation, corrective taxes, and tradable permits.
- Strategic implications: Corporate social responsibility and the internalizing of social costs.
Excerpt from the Book
3.3 Tradable Pollution Permits
Should there be a market for tradable pollution permits? In the section before was the example of a chemical company and the pharmaceutical company. Both companies must reduce their pollution to 300 tons a year. The pharmaceutical company could more easily reduce its pollution than the chemical company. So these two companies want to make a deal. The pharmaceutical company reduces its pollution to 200 tons a year and the chemical company increases its emissions up to 400 tons a year. The chemical company is willing to pay the pharmaceutical company € 5 million for it.
From an economic point of view, it is a good deal, both parties are doing better than before and no additionally externalities arise because the aggregate pollution stays the same.
If the government allowed such deals a new scare resource could be introduced: pollution permits. A market for pollution permits will be established and it will be forced by supply and demand. The invisible hand will allocate the resources efficiently. Those companies who require a great effort to reduce their emissions value the pollution permits most highly and they are willing to pay much over the odds for them. The companies which could reduce their emissions most easily are willing to sell their permits. As long as a free market for permits exists, the allocation will be efficient, separate from the initial allocation.
Summary of Chapters
1 Introduction: This chapter introduces the tension between economic self-interest and public policy, highlighting the differing views of Smith and Keynes regarding government intervention.
2 Market: This chapter defines the fundamental market forces of supply and demand and discusses the concepts of consumer/producer surplus and market failure caused by externalities.
3 Governments Intervention: This chapter details practical policy approaches—specifically regulation, corrective taxes, and tradable permits—to address inefficient resource allocation.
4 Conclusion: This chapter synthesizes the main arguments, concluding that while market forces are powerful, government intervention remains necessary to correct for negative externalities that impact third parties.
Keywords
Government intervention, Market economy, Invisible hand, Keynesian approach, Market failure, Externalities, Negative externalities, Positive externalities, Market efficiency, Regulation, Corrective taxes, Subsidies, Tradable pollution permits, Total surplus, Social cost.
Frequently Asked Questions
What is the fundamental focus of this assignment?
The paper examines the normative role of the government in market economies and evaluates whether, and in what ways, government intervention is necessary and effective.
Which two main economic theories are contrasted?
The assignment contrasts Adam Smith's theory of the "invisible hand," which advocates for limited intervention, with the Keynesian approach, which emphasizes the need for regulation to maintain market stability.
What is the primary research question?
The core question is whether the government should intervene in economic matters and what the potential impacts of such interventions are on market efficiency and societal well-being.
What scientific methodology is applied?
The author uses a descriptive and analytical approach, building on established economic literature to define market principles, analyze the causes of market failure, and evaluate specific policy tools like taxes and permits.
What topics are discussed in the main body?
The main body covers market equilibrium, the definition and types of externalities (positive and negative), and a comparative analysis of regulation, corrective taxation, and tradable permit systems.
Which keywords best characterize this work?
Key terms include market failure, externalities, government intervention, corrective taxes, and resource allocation efficiency.
Why is the concept of "social cost" important in this study?
Social cost is vital because it includes both the private costs of production and the external costs imposed on third parties, which are essential for determining the "optimum" production level from a societal perspective.
How do tradable pollution permits theoretically work?
They create a market for the right to pollute, where companies with lower abatement costs sell their permits to companies for whom reducing pollution is more expensive, leading to an efficient allocation of emission reductions.
What conclusion does the author reach regarding the "invisible hand"?
The author concludes that while the "invisible hand" is powerful, it is not omnipotent and can fail to allocate resources efficiently when externalities affect the well-being of third parties.
What strategic advice does the author provide to companies?
Companies are advised to incorporate environmental management and the awareness of social costs into their financial strategy to adapt to potential regulatory changes and fulfill corporate social responsibility.
- Quote paper
- Irena Stotz (Author), 2012, The Normative Economics of Gorvernment in Market Economies, Munich, GRIN Verlag, https://www.grin.com/document/266386
