Core econ:
- Doing economics, experiencing economics and core insights (just go in and read across)
Q1 . When should the government intervene?
- Motivation of the government intervention
- Outcome: allocative and pareto efficiency
- Market failure and redistribution
- Public good: non-excludable and non-rivalrous
- Information asymmetry: the seller knows but the buyer doesn’t, so have an agent in between (e.g. Car Dekho, amazon.in, RTO office)
- Monopoly: a single seller. High prices but lesser output. Intervention: MRTP Act
- Cartels: e.g. OPEC, is not allowed by the government. Cement cartels are banned by the government otherwise these companies can come together and charge higher prices.
- Externalities: Spillover effects
- Positive
- Negative
Market failure is defined as a problem that causes the market economy to deliver an outcome which does not maximize efficiency.definition
- Out of pocket expenditure (because there is no insurance) and this leads to poverty.
- Why do people not buy insurance or take vaccine, because they don’t take into account about others.
Let’s say that the government intervenes by mandating insurance for new vehicle purchases. People buy it for 3 years, but don’t renew it after that. This is because they don’t value the insurance. “I will drive safely, and so why do I need to pay premiums every month, if I will never get into an accident?”, if you get into an accident you only look at the personal cost, but the social costs are much higher than the prior.
- This is why people only buy “third-party” insurance, because that’s what is mandated.
Government failures:
- Air bags in cars were placed to make people safe, but they thought they’re more safe so became more careless while driving, causing more accidents.
For negative externalities,
- Charge taxes
- Carbon emission taxes lead to higher costs, so lower supply
For positive externalities,
- Create subsidies and reduce the price
Taxes and subsidies are leakages.
The mentality of people is that they don’t want to help the lower class people because if they rise, people ask “What about me? Where will I go?”
Skill Education Family Patterns (on a lighter note, Marriage patterns)
This is where the inequality of income comes in, that is why redistribution of income comes in
- PDS
- Ayushman Bharat (Health insurance for the entire family, up to 5 lakhs)
- Jan Dhan Yojna
Q 2. How might the government intervene?
The government can intervene in many ways:
- Taxes
- Subsidies
- Mandate
Laissez Faire, Nudge, Incentive, Mandate
Government can finance private entities to provide desired amount of a particular good in the society
- Medicines that are essential (even private ones) are subsidized by the government
- In Agricultural markets, government takes up part of the cost in building warehouses.
Effects of interventions:
- NRGES 100 days of free employment
- Direct effect: generating employment for the poor and effectively improving their lives through income generation.
- Indirect effect: dropout of labor force and joined MNREGS problem, creating labor shortage in other areas like agriculture.
- Freakonomics: Crime rates increasing
Q3. Why do governments do what they do?
- There can always be a