Question

Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved.
a) Regulating cable TV prices

b) Providing some poor with vouchers that can be used to buy food.

c) Prohibiting smoking in public places

d) Breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several smaller companies.

e) Imposing higher personal income tax rates on people with higher incomes

f) Instituting laws against driving while intoxicated.

Answer 1

Answer:

a) Regulating cable TV prices - This is motivated by the concern about efficiency. Since one cable TV company can easily become a monopolist and manage cable TV prices on its own, market power (a type of market failure) is hindered by regulation. These measures aim to decentralize power and distribute it once again.

b) Providing some poor with vouchers that can be used to buy food. - Being a concern for equality, this regulation aims to improve fairness and equality among society levels by giving vouchers to poor people. Equality measures are usually non-efficient by the means of concern, and are a common practice in all governments.

c) Prohibiting smoking in public places - Being a concern about efficiency, this aims to overcome a possible externality. Third parties (non-smokers) are affected by something they cannot influence, which indicates a case of externality failure. Government regulation is essential

d) Breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several smaller companies. - Once a monopoly, Standard Oil is broken down into several smaller, competition-oriented companies. The market failure regarding market power is regulated by this move. When this happens, Standard Oil will not be able to dictate prices.

e) Imposing higher personal income tax rates on people with higher incomes - Being an equality measure by nature, this economic remedy tries to create less discrepancy among income across all social levels. The standard deviation becomes smaller, which is the result of equality measures. Although people with higher incomes will always have a similar income, regulation vastly influences people with less income.

f) Instituting laws against driving while intoxicated. - This is an efficiency measure (against externality), as sober drivers and traffic participants become influenced by drunk drivers who they cannot control. In case of an accident, the third party is imposed a cost that could be fatal. Therefore, it has to be regulated.