Public policy in competitive markets, for the bad and for the good

In this seventh lecture of Economics for Everyone, we address the nature of government intervention in perfectly competitive markets.

Perfectly competitive markets lead to efficient outcomes, in the sense that no one can be made better off without making someone worse off. But that doesn’t mean we like the outcomes, that they are fair or justice, and as a result governments are often pressured, or even captured, to intervene, sometimes not for the broader social good, but for the benefit of a few to the cost of many.

At the same time competitive markets don’t always lead to efficient outcomes because prices don’t may not reflect all social costs and benefits. So we may have too much, or too little ,of some goods if we let the market work. Governments are often pressure to intervene for the benefit of many, but also at the costs  of some.

Source: https://clcouncil.org/economists-statement/

In this lecture, we work through a number of practical examples to illustrate rent-seeking behaviour in which a group can capture government policy to their benefit, and we also discuss market failures, and the consensus view of economists that these should be corrected with appropriate taxation. Agricultural support programs are one example, and putting a price on carbon is another.

Download the presentation for Lecture 7, “Understanding public policy in competitive markets” as a pdf, and if you like listen to narrated version.

“Perfect markets and the ‘World of Truth'”

In his widely read guide to economics—The Undercover Economist—Tim Harford writes:

In a free market, people don’t buy things that are worth less to them than the asking price. And people don’t sell things that are worth more to them the asking price. … The reason is simple: nobody is forcing them to, which means that most transactions that happen in a free market improve efficiency, because they make both parties better off—or at least not worse off–and don’t harm anyone else.

The chapter of his book called “Perfect Markets and the ‘World of Truth'” is the starting point and the end point of the next block of lectures in our course Economics for Everyone. Harford is describing both the power of markets, and the potential for their failures, big and small. He is describing what economics call the two fundamental theorems of welfare economics, and in order to do so he has to explore the determination of relative prices, the neoclassical theory of value.

In perfectly competitive markets we can describe the determination of prices in terms of demand and supply curves. And so we have to develop a facility in using these tools to understand how markets work, how they are sometimes manipulated for better or for worse, and how they may fail in a way that can rationalize a role for public policy.

Download the presentation for the next couple of lectures, and keep reading!