ECON 208 Chapter Notes - Chapter 16: Adverse Selection, Paternalism, Imperfect Competition

• School: McGill University
• Department: Economics
• Course: ECON 208
• Professor: El- Attar Mayssun

Document Summary

Chapter 16: market failures and government intervention. Monopoly on violence: when secure, citizens can carry out transactions. Importance of political institutions (or lack of) in economic collapse. Formal defense: based on allocative efficiency and the idea that without government price would equal cost etc etc. Allows individual choice on what to sacrifice rather than outside imposition. Innovation and growth: central planners may put too many eggs in wrong basket, rather than encourage experimentation and innovation. Decentralizaiton of power: governments would have to coerce firms to hire rather than leave it to diffusion, drawbacks are that markets don"t diffuse entirely and large firms have significant economic power. Market failures aka why government should be involved. When the market system fails to achieve allocative efficiency. Four situations where free market fails to achieve allocative efficiency. Market power: firms price setting unbalances efficiency, governments must accept imperfect competition for range of choices while maintaining active competition.