Tuesday, May 17, 2011

Government Intervention

One of the topics that I talk about in Principles of Microeconomics is efficiency. In an efficient market the demand for a product will equal the supply of the product. In order for that to happen efficiently, there must not be any outside the market factors affecting demand or supply. Some of those are externalities (demand side or supply side), limited competition (e.g. monopoly) or government (e.g. taxes). Another example of government intervention is where the government provides monetary aid, such as loan guarantees. This has happened in the solar panel market with Solyndra a solar panel producer that is producing a less efficient solar panel than those using photovoltaic cells. Solyndra used the loan guarantee to build a new (more efficient) factory and then is shutting down is old factory. This most likely would not have happened without the government loan guarantees. While the new factory is more efficient, if the product produced is not, this would be an example of government intervention that would be welfare reducing. In other words, the money used to guarantee the factory loan could have been used to provide tax payers with greater total surplus (economic welfare).

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