[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. 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. 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.
