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[MUSIC].
But even if there are no failures in the market, there may be a political or
ethical problem with how wealth and income are
distributed, that triggers government intervention into the free market.
To see this, assume for the moment
that the economy is functioning with complete efficiency.
Always on the production-possibility frontier and never inside it.
Always choosing the right amount of public versus private goods and so forth.
Even if the market system works perfectly, it might still lead to a flawed outcome.
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This may happen, because incomes are determined by a wide
variety of factors including effort,
education, inheritance, factor prices, and luck.
The resulting income distribution may not correspond to a fair outcome.
A rich man's cat may drink the milk that a poor boy needs
to remain healthy.
Is this happening because the market is failing?
Not at all, for the market mechanism is doing its job.
Putting goods in the hands of those who have the dollar votes.
Put another way, If a country spends more fertilizing its lawns than feeding
poor children, that is a defect of income distribution, not of the market.
Indeed, even the most efficient market system may generate
great inequality.
In this regard if a democratic society does
not like the distribution of dollar votes under
a free market or Laissez-faire market system, it
can take steps to change the distribution of income.
For example, it can engage in progressive taxation, taxing
large incomes at a higher rate than small incomes.
Or, impose heavy taxes on large inheritances
to break the chain of privileged by the same token.
Because low tax rates cannot help those who have no income at
all, governments can make transfer payments
which are money payments to people.
Such transfers today include aid for the elderly,
blind and disabled and for those with dependent children.
As well as unemployment insurance for the
jobless and food stamps and low cost housing
subsidies for the poor.
This system of transfer payments provides a
safety net to protect the unfortunate from privation.
And they are paid for from taxes levied on the more privileged.
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It is usual to ask, at this point,
what can economics contribute to debates about equality?
Economics, as a science, cannot answer
such normative or prescriptive questions about how
much of our market incomes, if any, should be transferred to poor families.
This is a political question that can be answered only at the
ballot box, or in some countries, at the point of a gun.
[SOUND].
This table summarizes the various reasons for, and ways that the government
can intervene in the private marketplace. Take a few minutes to study this table.
Note that the bottom half of the table deals with issues in macroeconomics.
While it is the top half dealing with inefficiency
and inequality that shall be our focus in microeconomics.
Dr. Peter NavarroProfessor
