POSC150 Lecture Notes - Lecture 28: Externality, Price Gouging, U.S. Consumer Product Safety Commission
27 Apr 2018
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● Why do we need the government to do all this?
○ Free Market Review (Adam Smith)
■ Invisible Hand of the Market
● Free market efficiently allocates resources on its own
● I.e. money, prices, workers, products, etc.
■ Government intervention messes this up
● Government should only provide the rule of law, protect property,
and provide basic public goods
● Regulation is often well intentioned but has harmful effects
■ The pursuit of self-interest (profit) leads to social benefits
● We will produce a greater diversity of products in greater
quantities and of great quality
○ Because the assumptions of the free market don’t hold in the real world (“Market
Failure”)
○ Assumption 1
■ Individuals have equal bargaining power
○ Assumption 2
■ Individuals have perfect information
○ Assumption 3
■ No external costs for transactions
● Market Failure 1 : Bargaining Power Disparity
○ Assumed that all decisions in the market are the result of contracts freely arrives
at between consenting parties
■ But… contracts are often coerced - people who are in a vulnerable
position have no choice but to accept the deal
○ But if you don’t like your contract (wages, working conditions) why not just quit?
■ When the alternative is poverty, quitting is not an option
■ When you’re sick and need medicine, you will pay any price
○ But don’t employers/producers and employees/consumers need each other?
■ Yes, but the employer/producer can hire/sell to tons of other people
■ The employer/producer has more power than the employee/consumer
○ Industrial Reserve Army (Marx)
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Free market efficiently allocates resources on its own. Government should only provide the rule of law, protect property, and provide basic public goods. Regulation is often well intentioned but has harmful effects. The pursuit of self-interest (profit) leads to social benefits. We will produce a greater diversity of products in greater quantities and of great quality. Because the assumptions of the free market don"t hold in the real world ( market. Market failure 1 : bargaining power disparity. Assumed that all decisions in the market are the result of contracts freely arrives at between consenting parties. But contracts are often coerced - people who are in a vulnerable position have no choice but to accept the deal. When the alternative is poverty, quitting is not an option. When you"re sick and need medicine, you will pay any price. Yes, but the employer/producer can hire/sell to tons of other people. The employer/producer has more power than the employee/consumer.
