ECON 151

• As an alternative to producing the goods themselves, however, the government can regulate private firms—

  • for example, by controlling their prices— to ensure that they do not exercise their monopoly power.
• Government does not have to produce public goods; all it has to do is pay for them
• Private goods that are publicly produced postal services and utilities
• Market failures do not provide a rationale for government production even though market failures provide a rationale for some form of government intervention
• What does market failure not provide a rationale for?

  government production of public goods
• In most countries, governments run the school systems, and, in

  almost all countries, the postal system
• Until a few years ago, in most countries governments also ran public utilities such as telecommunications.
• Privatization has been particularly widespread in the market-based economies of Japan and Western Europe, as well as the transitional economies of Eastern Europe and Asia, especially in utilities (gas, electricity, and telecommunications) and transportation (railroads and airlines).
• There is often no simple way the government can intervene to ensure that the actions of profit-maximizing firms reflect broader public interests.
• Why does the government not contract out to private firms to run the national defense system?

  no simple way government can intervene to ensure that profit-maximizing firms reflect broader public interests
• What particular state believe that they can best achieve its social objectives by exerting direct control over key economic sectors (nationalization)?

  Latin America
• In what way do some states believe they can best achieve their social objectives

  by exerting direct control over key economic sectors
• What does it mean to exert direct control over key economic sectors?

  government takeover, or nationalization
• Deliberate nationalization as part of a government’s development strategy is different from

  unintended, de facto nationalization
• When does unintended, de facto nationalization often take place?

  amidst an economic crisis
• What does de facto nationalization mean?

  When a government takes over a business without paying for it.
• De facto government takeovers are meant to be temporary
• What type of gov't takeovers are meant to be temporary?

  de facto gov't takeovers
• What does mortgage mean?

  Loan
• What alternative can government do instead of a takeover in a financial crisis?

  provide massive funds
• What does impediment mean?

  Obstacle
• An example of market impediment

  limited competition
• Although market impediments (such as limited competition) and concerns about broader objectives provide motivations for public production, what is a compelling argument against public production?

  often, but not always, governments seem to be ineffi cient producers
• What are motivations for public production?

  market impediments
• What are motivations for public production?

  concerns about broader objectives like nationalism
• Government can produce private goods. True or False?


  True
• What is the primary concern in government production of private goods?

  efficiently provide at the lowest possible cost
• When does the most important market failure that has led to public production of private goods arise?

  when markets are not competitive
• What can partly explain government production of postal services, telecommunications, water, harbors, and electricity?

  natural monopoly
• What is a common reason why markets may not be competitive?

  increasing returns to scale
• What does increasing returns to scale mean?

  average cost of production decline as the level of production increases
• What does increasing returns to scale mean?

  Increasing returns to scale refers to a situation where an increase in inputs leads to a more than proportionate increase in outputs.
• In what case does economic efficiency require that there be a limited number of firms?

  existence of increasing returns to scale
• Industries for which increasing returns are so significant that only one firm should operate in any region are referred to as?

  natural monopolies
• Example of natural monopoly


  water
• The major cost associated with delivering water

  network of pipes
• The additional costs of supplying water to one extra user are?

  relatively insignificant
• Example of natural monopoly


  electricity, cable TV, and natural gas
• average cost curve and the demand curve for a natural monopoly

  a natural monopolist would operate at Q1

  
• Why would a natural monopolist operate at Q1?

  no sunk costs and potential entry