Question

Explain whether each of the following government activities is motivated by concern about equality or a concern about efficiency. In the case of efficiency discuss the type of market failure involved.

1. Regulating cable TV prices
2. Providing some poor people with vouchers that can be used to buy food
3. Prohibiting smoking in public places
4. Breaking up standard oil (which once owned 90 percent of all U.S. oil refineries) into several smaller companies
5. Imposing higher personal income tax rate on people with higher incomes.
6. Enacting laws against driving while intoxicated

Short answer

1. Motivated by the concern about efficiency, market failure due to monopoly power
2. Motivated by the concern about equality
3. Motivated by the concern about efficiency, market failure due to negative externality
4. Motivated by the concern about efficiency, market failure due to monopoly power
5. Motivated by the concern about equality
6. Motivated by the concern about efficiency, market failure due to negative externality

Step-by-step solution

Activities motivated by concern about equality

Equality is about the equal distribution of income or output. In activities b and e, the government tries to ensure equality. The vouchers can ensure equal distribution of food in society. The income taxes are generated to fund the welfare schemes that are aimed towards equality.

Activities motivated by concern about efficiency

Efficiency is about producing the socially desirable level of output at the socially desirable price level. In activities, a, b, c, and f, the government tries to ensure efficiency.Regulating cable TV prices and breaking up standard oil will bring the price down and increase the output.

Type of market failure involved in each case

Market failure is the failure of the market to produce efficient output at efficient prices. The monopoly power charges a very high price, as in cases a and d, and produces limited output. As in cases c and f, the negative externality produces more than the socially optimum output at a lower than the socially optimum price level.