No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Thirteen: Market “Failure” and the Role of the Government 314 TV and Dish Network were prevented from merging in 2002 by the Federal Trade Commission (FTC). The companies asserted they would be able to more efficiently provide new services and compete against cable TV, but regulators were ostensibly concerned that people dependent upon satellite TV (with no cable coverage) would be harmed by price hikes. Whether this legislation does more good than harm is a matter of debate; as we’ve reviewed, the lack of competitors does not necessarly preclude competition (because of contestable markets). A second way of addressing market failure to achieve allocative efficiency is through regulation. The government can regulate a specific business or industry to charge a certain amount to thereby increase output (such as P* in Figure 13.8 earlier). For example, most electric utilities have exclusive rights to provide electric power for a given region. The prices the utilities are allowed to charge usually have to be approved by a state public utilities (or service) commission. We’ve already discussed the problem of how the central planner can know the right price. In the next chapter we’ll address what incentives regulators face to actually set the correct price, assuming they could know what that price should be. GOVERNMENT AS ROBIN HOOD In addition to economic arguments that government involvement may improve allocative efficiency, some call for government to address equity concerns. In this view, government should be an arm for social justice, equality, and income distribution. While social justice is a nebulous term and used nowhere in the Bible, its propopents typically demand government tax policy to promote a “fairer” income distribution and/ or to alleviate poverty. So let’s examine just a few of these issues. This is not meant to be exhaustive, but simply to introduce you to the issue a bit more formally than perhaps your neighbor’s diatribe on some particular ill! INCOME INEQUALITY You have likely heard the old saying that “the rich are getting richer and the poor are getting poorer. ” Whatever those who say this mean, it is not true as stated —for several reasons. First, while those who are categorized as rich are indeed getting richer, those categorized as poor are getting richer too—by almost any standard of measure. Technology and economic growth have benefitted the poor disproportionately, as illustrated by Professor Don Boudreaux’s presentation comparing the purchasing power of real wages of the ‘70s to today . For example, the very wealthy never washed their clothes by hand—they had servants to do that. Yet now, almost 70% of the poor have washing machines (risen by 10% over the last 20 years). Nearly 80% of the poor had air conditioning in 2005, while less than 1/3 of all Americans (rich and poor alike) had air conditioning in 1971. By most measures, one would rather be a poor American in 2020 than a rich king in 1700. Think dental care!