Question

Explain the concepts given below by exemplifying them.
a) Public Choice

b) Economic Efficiency

c) Pareto Optimality

d) Market Failure

e) Government Failure

Answer 1

a) Public choice:  Public choice is "the use of economic tools to deal with traditional problems of political science". Its content includes the study of political behavior. In political science, it is the subset of positive political theory that studies self-interested agents (voters, politicians, bureaucrats) and their interactions, which can be represented in a number of ways – using (for example) standard constrained utility maximization, game theory, or decision theory.

(b) Economic efficiency: Economic efficiency is when all goods and factors of production in an economy are distributed or allocated to their most valuable uses and waste is eliminated or minimized.

Economic efficiency indicates a balance of loss and benefit. Example scenario: A farmer wants to sell part of his land. The individual that will pay the most for the land uses the resource more efficiently than someone who does not pay the most money for the land.

(c) Pareto optimality: Pareto optimality is an economic state where resources cannot be reallocated to make one individual better off without making at least one individual worse off. Pareto efficiency implies that resources are allocated in the most economically efficient manner, but does not imply equality or fairness. An economy is said to be in a Pareto optimum state when no economic changes can make one individual better off without making at least one other individual worse off.

(d)  Market failure: Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market. Furthermore, the individual incentives for rational behavior do not lead to rational outcomes for the group.

Commonly cited market failures include externalities, monopoly, information asymmetries, and factor immobility. One easy-to-illustrate market failure is the public goods problem.

(e) Government Failure: Government Failure refers to when the government intervenes in the economy to fix a problem, but only ends up creating more problems. That means it harms social welfare and/or makes the market less efficient. In order for government failure to occur, there first has to be a market failure. That means that the market is failing to produce positive outcomes for society. The government will then decide whether and how to intervene. If the government intervenes and only makes the problems worse, then it has failed.