[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Correcting Market Failures Chapter 11 described four sources of market
failure in the economy: imperfect competition, imperfect information, externalities,
and public goods. Government programs are aimed at redressing market failures
in each of these major categories. For instance, under imperfect competition, firms
use their market power to raise prices and reduce output. Antitrust policies set by
government attempt to maintain a competitive marketplace and restrain firms from
abusing their market power. Imperfect information may impede the efficient functioning
of product and labor markets. Governments establish regulations to require
firms to produce information on their products and on their financial condition.
Moreover, governments often play a large role in providing social insurance that helps
protect against the risks of unemployment or illness, in part to provide relief for
problems caused by imperfect information. In the presence of externalities, firms produce
too little of goods (like research) accompanied by positive externalities and too
much of goods (such as those that generate pollution) accompanied by negative
externalities. Governments subsidize the former and tax or otherwise regulate
the latter.
Equity and the Redistribution of Income But even if markets were efficient,
they would result in some individuals receiving too low of an income to survive at a
standard of living that is viewed as socially acceptable. In the market, individuals’
incomes are related to their ownership of assets and their productivity. Those with
little education receive low wages. And even in the United States, most individuals have
few assets: the bottom 75 percent of households by wealth own less than 15 percent
of total wealth, and the average wealth of the bottom 25 percent of all households
was less than $1,100 in 2001. Income in the United States is highly unequal: the top
10 percent of households receive 30 percent of the income, and the bottom 20 percent
receive just 2 percent of total income. Wealth is even more concentrated, as the top
10 percent of households have 70 percent of the wealth; the bottom 50 percent, only
3 percent. Some countries have even greater inequality of income and wealth, while
others, such as many European countries, have somewhat less.
Inequality raises concerns for several reasons. High levels are often associated
with a variety of social and political problems, which in turn often result in a climate
that does not favor investment. East Asia and Latin America illustrate the two
extremes. Over the past thirty years, the countries of East Asia have grown very
rapidly—at more than twice the rate of those in Latin America—and many economists
believe that the greater degree of equality in East Asia provides at least part
of the explanation. Many of the countries of Latin America, characterized by great
inequality, are plagued by urban violence and political unrest.
In most societies, there is a concern about social justice or fairness. It seems
morally wrong for so many of society’s goods to go to so few. But fairness, like beauty,
is often in the eye of the beholder. Many of those with high incomes and wealth
believe that they deserve their fortunes. Attitudes toward inequality differ markedly
across countries and have changed over time. In the United States, inequalities
explained by individual effort are far more acceptable than inequalities linked to
inheritance. Wealth that results from a brilliant innovation is more acceptable than
wealth gained by the exercise of monopoly power or political influence (as wielded
by the nineteenth-century “robber barons”).
378 ∂ CHAPTER 17 THE PUBLIC SECTOR