Why do governments intervene in private markets? Why do governments regulate?

• Imagine no property rights, criminal law, tort law, contract law

• Imagine only property rights, criminal law, tort law, contract law

Security Criminal/tort law,

Encourage investment Contract law

Encourage innovation Property rights / IP

Encourage gains from trade

Terminology:

• Pareto optimality (vs. alternatives)

Market Failure I: Misuse of Economic Power

• Control of monopoly power

• Unfair competition law

• History

Market failure II: Natural Monopoly

• Economies of scale

• Network effects

• Bottleneck industries

Response?

• Public ownership vs. Price / service regulation

What does price / service regulation mean?

Market Failure III: information asymmetries

• Economic theory in order to have efficient markets, all participants need reliable information

• E.g., Securities, consumer products

Market Failure IV: Providing/maintaining Public Goods

• What are public goods? What distinguishes public goods from other goods?

Market Failure IV: Providing/maintaining Public Goods

• What are public goods? What distinguishes public goods from other goods?

• Free to use

• Nonrival consumption

• Tragedy of the commons

 

 

PRISONER'S DILEMMAWhether to testify against his partner in crime (“defect”), or to

“cooperate” with his fellow prisoner by remaining silent.    

Prisoner A 

Cooperate Defect Prisoner B

Cooperate | -2, -2 -10, -0  

Defect | -0, -10 -6, -6 

 

 

PRISONER'S DILEMMACardinally valued outcomes: 4=best; 1=worst

   COLUMN

 Cooperate Defect

 ROW

Cooperate | 3, 3 1, 4  

Defect | 4, 1 2, 2 

Playing the PD game:

• No communication between players

• First game: 10 rounds

• Second game: unknown duration, 5-15 rounds

Is the PD a good metaphor for public goods management, or other types of market failure, in your view?

Is the PD a good metaphor for public goods management, or other types of market failure, in your view?

• Rule against communication

• Repeat play issue

• Civil society vs. state of nature: Contract law

• “Leviathan Solution” vs. property rights (Coase Theorem)

History of Regulation

• Rise of economic power public ownership / regulatory commissions / competition law. These arose simultaneously in U.S. and elsewhere.

• Populism Progressive Era

• Latin American left-populism

• New Deal securities laws

• Post-WWII consumerism / environmentalism (60s and 70s) – U.S., Canada, Europe

Cumulative

# of

laws

1800 1900 2000

Era of the robber barons

Progressive Era

New Deal

Accumulation of Regulatory Statutes

1960s-70s

Dangers of Regulatory Accumulation?

• Translating popular preferences into policy outcomes

• Ossification

• Moral hazard

Wednesday: Property rights and political risk; federalism