2. Explain whether each of the following government activities is motivated by a

Question

2. 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.

Explanation / Answer

a. regulating cable TV prices - primarlly an efficiency enhancement tool but also adds to fairness- the type of market failure being corrected is one of monopoly producing less than socially optimal output. b. providing some poor people with vouchers that can be used to buy food - primaily an instrument to ensure equity by enabling poor people to enjoy minimum level of food/ nutrition. c. prohibiting smoking in public places - primarily an efficiency enhancing instrument to ensure that the private consumption is reduced to socially optimal level. Here the market failure occurs due to negative ties in cigeratte smoking d. breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several companies- prpmaily an efficiency enhancing instrument to correct for market failure due to monopoly producer. It also helps better equiy as consumers will benefit from lower prices. e. imposing higher personal income tax rates on people with higher incomes --- primarily an instruent of enhancing equity to make people who have higher capability to pay taxed more than others in the low income categories. f. instituting laws against driving while intoxicated - effeciency enhancing instrument. It helps reduce accidents on the road. This is necessary to correct for market failure in the preence of negative external social effects or social costs.

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