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

home in 2005 when the drug manufacturer Merck had to pull its pain relief drug
Vioxx off the market after studies suggested it increased the risk of heart attacks and
strokes. Critics of the FDA argued that the agency is not adequately monitoring the
safety of drugs once they are approved, and proposals have been made to establish
a new government review board whose job it will be to decide when new information
warrants removing a drug from the market.
Even in the absence of regulation, firms have incentives to signal to buyers that
their products are of high quality. One way they do this is to offer guarantees that a
producer of low-quality goods could not afford to offer.
Imperfect information also can interfere with incentives. Employers want to
create incentives for employees to work hard. One way to do this is to base pay
on a measure of how productive each worker is. Often, however, it is difficult to
measure a worker’s productivity. Under such conditions, it is difficult to link pay
to performance. For example, a major debate in the United States concerns
tying teacher salaries to performance. Because it is hard to measure teaching
performance, the pay of most teachers is based primarily on how long they have
been teaching.
Information, or its absence, plays a key role in determining the shape of markets
and the ability of private markets to ensure that the economy’s scarce resources are used
efficiently.
DISTRIBUTION
The market economy determines not only what goods are produced and how they
are produced but also for whom they are produced. Many people find unacceptable
the way the market distributes goods among households. “While recognizing the
efficacy of capitalism to produce wealth, there remains considerable unease among
some segments about the way markets distribute that wealth and about the effects
of raw competition on society.” 2 Like bidders at an auction, what market participants
are willing and able to pay depends on their income. Incomes differ markedly
across occupations. Some groups of individuals—including those without skills that
are valued by the market—may receive such a low income that they cannot feed
and educate their children without outside assistance. Government provides the
assistance by taking steps to increase income equality.
Steps that soften the distributional impact of markets may blunt economic incentives.
While welfare payments provide an important safety net for the poor, the taxation
required to finance them may discourage people from working and saving. If
the government takes one out of every two or three dollars that an individual earns,
that individual may not be inclined to work as much. And if the government takes
one out of every two or three dollars a person earns from interest on savings, the
person may decide to spend more and save less. Thus, efforts by the government to
redistribute income may come at the cost of reduced economic efficiency.
2
Alan Greenspan, speech at the Federal Reserve Bank of Kansas City Jackson-Hole Conference, August 25,
2000.
14 ∂ CHAPTER 1 MODERN ECONOMICS