9781118041581

Summary 485

SUMMARY

Decision-Making Principles

1. There are three main causes of market failure: monopoly power,
   externalities, and imperfect information. Each case offers a potential
   role for government regulation.


2. Benefit-cost analysis identifies all impacts (pro and con) on all affected
   members of society, values these benefits and costs in dollar terms, and
   sums all benefits and subtracts all costs to determine net benefit. A
   project should be adopted or a regulation enacted if, and only if, it has a
   positive net benefit.


3. This last rule does not formally account for distributional effects.
   Nonetheless, the cataloguing of costs and benefits should alert the policy
   maker to the equity and distributional consequences of the program.

Nuts and Bolts

1. Deadweight loss measures the reduction in net benefits when the level of
   output differs from the efficient (i.e., competitive) outcome. Under
   monopoly, the deadweight loss triangle stems from the production of too
   little output. Rent seeking measures the costs that occur when firms
   expend resources to obtain monopoly power. Measures to promote
   and/or restore competitive behavior are the most effective remedies for
   monopoly.


2. An externality is an impact or side effect that is caused by one economic
   agent and incurred by another agent or agents. An efficient means of
   regulation is to tax the producer of a negative externality an amount
   exactly equal to the associated marginal external cost. Under conditions
   conducive to bargaining, externalities also may be resolved via monetary
   payments between the affected parties.


3. Pure public goods are nonrival and nonexclusive. The optimal quantity
   of a pure public good is determined where the sum of the marginal
   benefits to all affected groups equals the good’s marginal cost.


4. The basic benefit-cost decision rules are as follows:
   a. Distributional consequences aside, undertake a single public
   investment if and only if the present value of net benefits is positive.
   b. In a choice among mutually exclusive alternatives, select the one with
   the highest present value of net benefits.
   c. In public decisions involving resource constraints, select combinations
   of programs that maximize total net benefits subject to the constraints.

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