What is market failure, and what are two ways of preventing it?
· Market failure is an event caused by competition failure, asymmetric information, or externalities
· The federal government can prevent market failure in two ways:
1. Economic stablization (i.e., to stabilize the macroeconomy, or in other words, to prevent high unemployment rates, high inflation rates, market failure from occurring at all, and to improve possibilities for economic growth and a better quality of life) (e.g., a low stable inflation rate can result in a low unemployment rate)--there are two types of policies that do this:
a. Monetary policy manipulates the amount of money available to the public and the terms under which credit is provided (this was partially paraphrased and partially quoted from the book)--it manipulates interest rates which eventually affects unemployment rates--it is much faster to implement because it does not need to get approval from any houses of government (in the U.S. and most developed countries, the Federal Reserve or central bank handles this--in developing countries where central bank independence is weak, the government helps with this, too)
b. Fiscal policy manipulates taxes and expenditures, which in the end will affect unemployment rates--it takes much longer to implement because it must get approval from different houses of government; however, since 2007 when interest rates neared zero and there was not enough money left in Federal Reserve, fiscal policy had to be used
2. Redistrubute wealth (income requires access to valuable resources in market economy like property, skills, etc.--if access is restricted by family ties or something else, then sometimes need government to step in and help (sometimes, not always, because the poor don't always suffer in a pure capitalist society (i.e., without government intervention)))--government can intervene with progressive taxes (inefficient and less targeted, so more than target group is affected) or transfer programs (able to reach target group much more efficiently and accurately with these)