Saturday, March 31, 2012
The Problem with the Minimum Wage
The main argument made by those in favor of a minimum wage is that it raises the standard of living for the working poor and, thus, reduces poverty. The main argument against it is that it increases unemployment. A business owner will hire workers as long as its marginal product of labor doesn’t drop below zero. What this means is that if the owner can employ someone for $6/hour who gives him $6/hour worth of productivity, he will do so. However, if the owner is forced to pay the worker $7/hour, keeping him would actually cause the owner to lose money. Therefore, while some workers would make a marginally higher income, some would lose their jobs and make no income. Some are helped a little, while some are hurt a lot.
In addition, some of the costs borne by business owners due to higher wages will be passed on to consumers by way of higher prices. Higher prices are regressive in nature. By this, I mean the higher one’s income is, the less one is affected by higher prices. Conversely, the lower one’s income is, the more one is affected by higher prices. As a result, any price increase caused by a minimum wage will affect the very people the proponents are trying to help the most.
A third argument against a minimum wage is one not much talked about. A minimum wage essentially transfers income to unskilled workers. Normally, when the government transfers income – to help the poor or tornado victims or the Auto Industry, for example – these transfers are paid from tax revenue and all taxpayers bear the costs. However, the income transfer brought about by a minimum wage causes employers of unskilled workers to bear the brunt of the burden. (Some of this, as mentioned above, is passed on to consumers.)
So, are minimum wage laws even effective or, for that matter, even fair? A more targeted approach to helping the working poor seems more appropriate. The Earned Income Tax Credit, for example, gives unskilled Americans the incentive to be productive members of society and ending minimum wage laws would allow more of them to do so. In addition, according to the Bureau of Labor Statistics, half of minimum wage earners are aged 25 or less. The majority of these aren’t even the working poor that the minimum wage is intending to help.
The minimum wage is a feel-good policy that politicians use to show how they are helping poor people. And they don’t even have to raise taxes to do it! Many people have bought into the feel-good argument, but haven’t considered the drawbacks.
The Cost of Going to College: Students and Parents Feel the Pinch
While many people still believe that education is one of the best investments one can make in lifetime, you should never underestimate its price especially in the continued stagnant and sluggish moving economies that face the US. Many experts say that college tuition costs continue to skyrocketing at rate that outpaces inflation by a considerable margin (http://www.ibtimes.com/articles/214426/20110915/unemployment-jobs-economy-college-graduate.htm). Yet, college graduates almost struggle like everyone else to better off their lives. Conversely, decades ago, a college education was quite inexpensive and it was almost an automatic ticket to middle class life style but today dynamics are not certain given the economic uncertainty.
Alluding to a catchphrase “Planning for college, planning for debt” many people have even gone beyond questioning whether going to college worthwhile investment. According to the book “Academically Adrift: Limited Learning on College Campuses” 45% of college US college students exhibit no significant gains in learning after two years in college. This shows that it is equally imperative to further education to make change but at what cost? For instance, Paul Davidson, in USA Today (http://www.usatoday.com/money/economy/employment/2010-12-06-collegegrads06_ST_N.htm) reports that unemployment rate for college grads is highest since 1970. The worrisome problem is the cost of college tuition that continues to go up. In this regard, let’s discuss the question at hand whether there is a market failure because of government involvement in education sector on one hand, or whether the situation of high costs for college would have been different should education be handled by the free market.
First, based on any other good or service production theory that require a combination of land, labor and capitals that are directed at a particular objective, some economists argue that free market can actually yield more in education at reasonable price than what is done by government. On the other hand however, government defenders enlisted various economic arguments related to market failure to dispute the idea that parents in a free market should ultimately determine what educational services are offered. Next, without the government intervention some parents would not bother sending their children to school at all. Also, I find that without government involvement, in other words providing subsidies such as financial aid and others, children from poor families would not be able to go to school. On the same note, free market defenders fight back saying that based on entrepreneurship theory, education should not be seen as best when it is left to government; rather the free market is better positioned to efficiently allocated resources that are underused in many instances and the government is not up to that task. They continued saying that the government bureaucracy is seen as the opposite of enterprise. It stifles enterprise and therefore government domination of education assures that the entrepreneurial innovation and creativity are accustomed while entrepreneurship has precondition that encompasses freedom and private property on both the supply and demand sides. http://www.thefreemanonline.org/columns/can-the-free-market-provide-public-education/
Seen in the lenses of the above contentions, one would wonder whether cost of going to college would be any different. Arnold Kling may be right when he asserted that he is not sure where the market failure would be in current education system but he recognizes that the accreditation monopoly is one market imperfection to which he pointed out. Indeed, if we look at cost of going to college in the US everyone should be concerned. In fact, expert think that after the busting of bubble in housing industry, student loans bubble is about to bust. Dennis Cauchon in US Today reports that student loans outstanding will exceed one trillion this year (http://www.usatoday.com/money/perfi/college/story/2011-10-19/student-loan-debt/50818676/1). If economy does not improve to boost hiring college students so that they can pay off their student loans what would happen or what would the government do - or again what would have the free market done differently? Surprisingly, Tony Mecia reported that even the Federal Reserve son who is medical graduate has accumulated $400,000 in debt! http://www.creditcards.com/credit-card-news/student-loan-debt-time-bomb-1279.php
Needless to say, government involvement in education is a controversial matter in which it is hard to depict whether there is a market failure associated with the high cost of student loans. If everything has gone up in price how education would have been immune?
Friday, March 30, 2012
The Trouble with Retirement, You Never Get a Day Off
You hear it all the time, particularly if you read too many financial blogs:
“I’m not counting on Social Security to be there when I retire, so I’m ignoring it in my retirement planning. If it’s still around, it’ll be a nice bonus.”
In other words, to be prudent, we should treat Social Security like the inheritance we might get from an eccentric uncle with mysterious finances. When you hear someone say this, however, you can be sure that the speaker is (a) very wealthy or (b) doesn’t understand what ignoring Social Security actually means.
The question I want to ask is: if you’re skeptical about the future of Social Security, do you think we should even have social security? Is social security constitutional? Are you going to retire, if so when? Lastly, how social security works; Are there any sources of market failure through inefficiencies, moral hazards and adverse selection.
First, we must understand what being retired actually means. Retiring would require us to quit working, and live off of our accumulated savings. When we retire, we're deciding to no longer be a productive member of the economy. We must understand retirement in order to understand social security: Old Age Survivors Disability Insurance; As you can clearly see social security is not a retirement or pension plan.
Secondly, How does social security work? This is important to understand so we can explore whether or not social security is constitutional. Most people believe that social security is a trust fund, that we invest our money through the government with our taxes. Like it is a secret black box with saved money from our investments, that we plan on using when we retire so we can continue to receive money. Sorry to break it to most Americans, but that's not exactly how social security works. The government really buys treasure bonds with the excess tax money. Which in turn, just becomes part of our huge outstanding National budget. The government will tax more than they need so they can pay back the social security checks through buying treasure bonds, lastly leading to the government spending all of the money. To clarify, Treasure bonds are a promise to pay the beneficiaries. So now the T bills are the money promised to the beneficiaries.... Social Security is a big lie! It's one government agency lying to another government agency.
To fix this problem, we would need to make more money(causing inflation), Tax more(increasing money flow) and sale our T bills to foreigners(essentially borrowing). The government by law is obligated to pay these T bills, but when the T bills run out then the government will us up to 70% of revenue. What we really need to be saying is Social Security really is a "Income Redistribution Plan" and seems to be unconstitutional. This is how social security really works, the question is though; Do we have a source of market failure within our own policy?
Thirdly, lets explore all possible market failures within social security and any possible productively efficient conclusions. I personally don't see a positive externality, negative externality nor does it look like a public good. What we need to ask is, "Is Social Security just?" Remember it is a income redistribution plan from young to old, and it's important to look at HOW the government uses it's force in implementing this distribution plan. The government uses its "force" by binding the next generation to pay for what you already received prior to him/her ever being able to vote. Therefore, this is inefficient and intergenerationaly unjust.
This can be inefficient by modeling the opportunity cost of gaining more information. The people in Washington, call it insurance.... This is part of the lie. Insure is to cover the cost for the case of a BAD situation. Recall, Social Security means: Old, Age, Survivor, Disability Insurance. I don't see a BAD event, so why insurance then? The bad event is what you will be insuring on, but what is that bad event? The bad event I see that I would want to insure against is me running out of assets before I die. So, we must insure against running out of assets before dying or out living our wealth.
It's important to remember that insurance is correlated with moral hazard and adverse selection. Moral hazard and adverse selection can be a source of market failure if found with in the policy. Examples of moral hazard in our case would be: The insured choosing to be more risky, the idea of a pension and that the government backs you leads me to believe there is a market failure. We could control the moral hazard through the deductibles though.
Adverse Selection may also be a source of market failure in our model. For instance, only the risky ones ask for insurance, making a risk pool but it's hard to make a profit with the risk pool. Therefore, this can lead to a market failure but we can also control adverse selection through premiums. Remember it takes two to tango, Supply and Demand.
To conclude, we must insure against running out of assets before dying or outliving our wealth. There may be a role for the government to place an insurance. You would pay a premium and they would pay you your benefits. Fire insurance model may be better, and there will be an insurance pool (annuity). Also, this plan will be much smaller so you don't pay out as much, and receive the same. We want it to look more like insurance rather than a trust fund. To be honest though, I don't know if we can solve this with a government plan. Although, we maybe could tax consumption instead of income. This would promote saving, which in turn generates capitol accumulation. Furthermore, overtime we will be more productive, grow 4-5% a year and this would help social security and retirement.
Wednesday, March 28, 2012
Negative Externality of Legal Prostitution
Prostitution (i.e. the act of exchanging money for sexual service) in the United States is illegal in all but one state, Nevada. In Nevada, prostitution is illegal in four counties (Clark, Washoe, Douglas & Lincoln) and Carson City (the state capital). All other counties and cities, in Nevada, can have legal brothels. Rhode Island (between 1980 through most of 2009) did not criminalize most forms of prostitution (excluding such acts as street walking, etc.).
Sexually transmitted diseases (STDs) can be a source of market failure in legal brothels in Nevada. A negative externality (unintentional, non-market interdependence) exists in this market. If a legal prostitute tests positive for HIV/AIDS, she no longer works. This is Nevada state government force. The unintentional, non-market interdependence (third-party) detriment of a man going to such a brothel and acquiring HIV then sharing it with his girlfriend or wife exists (as a possibility). This is a negative externality (for the girlfriend or wife). The risk exists because a legal prostitute could acquire HIV and transmit it to a male client between mandatory STD tests.
I believe government regulation can be justified (for legal prostitution in Nevada), because it forces the women to take responsibility (requiring safety precautions to be taken for the sake of their livelihoods); in other words, they have to “put skin in the game” to continue working legally in Nevada (as prostitutes).
Government Hates Competition
Tuesday, March 27, 2012
With the US. Supreme Court hearing of oral arguments concerning legitimacy of "Obamacare" or health care reform bill, signed into law by president Barack Obama two years ago, I'll talk about whether or not healthcare insurance market had a market failure, consequently forcing government to step in and provide healthcare insurance to the public. The subject of health care is very broad. I'll touch only some aspects of this question.
Maybe for the first time, reading an article in POLITICO about heath care reform, I began to analyze the meaning of the words that were used by its author Tom Daschle, and framing tequiniques that he used to sell his perverted logic about legitimacy of mandating every american to buy a health insurance.
First of all, we'll have to figure out, whether health care insurance industry has one of the following properties:
1. is a public goods
2. has positive or negative externalities associated with it
3. has monopoly power.
If we can positively answer to any of those questions, then, we might consider exploring the possible market failure in this industry that forced government to provide these services.
1. It's clear that health insurance is not a public good because it's excludable and it's rival (if government will not make it non rival by policies).
2. I cannot think of any non-market, unintentional positive or negative interdependence between me or for that matter any other individual, and another person who has or does not have a heath insurance.
3. Since we have more than one heath insurance companies, it's safe to assume that there is no monopoly in this case.
Answering negatively on the questions above, according to market failure criteria, we can assume that there is no market failure in health insurance industry and that government should not intervene.
However, Mr. Daschle, the former senator, sees the failure, or the "issue," as he called it, in the fact, "that not everyone wants to pay for health insurance. Those of us that have spent decades trying to improve the private insurance market have struggled to find a solution to this central dilemma."
The fact that not everyone wants to pay for heath insurance is a simple correlation to a fact that not everyone wants to have a health insurance. That's exactly what constitutes a free market of voluntary exchange. It's so simple and obvious that I don't know how former senator missed it. If government thinks that everyone should have heath insurance, that means that government is concerned about its citizens' heath condition. Does it mean that very soon government will require every one to visit a doctor every so often regardless of whether they want it or not?
"Those" people, like Mr. Daschle, who have spent decades trying to improve the private insurance market have actually made it worse. The only think they should do is to leave the PRIVATE industry alone and it will fix itself. There is no "dilemma," unless freedom itself, to be able to chose whether or not to have a health insurance policy, is a dilemma for a former senator As soon as government tries to "fix" something it should not have touched, it actually makes it worse.
In addition, insurance means pooling the risks of many people in hope that the bad event will not happen. If government wants to "insure" people so they would have a greater access to doctors, it's the same as saying that insured auto owners have greater access to accidents. We have to keep in mind, that auto traffic is highly regulated, which reduces the risk of bad events taking place. Does it mean that government will regulate our lifestyle habits (exercise, food choices, rest, etc.) to reduce risk of getting sick? At the end, most people die because of age related sicknesses, which means that there is no way to escape the "bad" event of sickness in its broad definition as it's defined right now. It's probable not to have cancer, heart attack, stroke, broken bones, and many other medical issues. However, it's not probable to escape some minor illnesses and at the end to die, which means that it does not make sense to insure against an event that we know will happen.
In my opinion, there are no economic or legal grounds for government to mandate, to force individuals to buy a heath care insurance or to run a government based insurance company.
Monday, March 26, 2012
Social Security and Socialized Health Care
Social Security is a popular debate topic in recent times. To further explore the issues currently being raised about the government program, I read several articles in The Economist and chose to use two of them in my discussion: Pensions: The challenge of getting Americans to save more and America's safety net, part two: Taking Social Security and feeling you've earned it (Throughout this blog post I will refer to the former as “Pensions” and the latter as “Safety Net”). There are several similarities between the two articles, as well as, the discussion we had in Economics of the Public Sector, regarding alternative approaches to a government-implemented retirement plan that would better suit the needs of retirees.
While both articles are incorrect in defining Social Security as an insurance program (understandable considering it is the definition the government has given Social Security) both also mention an alternative to Social Security that looks more like a government-required investment program; essentially, a pension plan. While I do not believe there is any source of market failure associated with any individual’s retirement savings—no externalities, no monopoly power, no public goods—and thus, no justification for government to have any type of Social Security program in the first place, if one is going to exist, it would be more constitutional to have a program in which each individual gets returned what he/she puts in, instead of the system of Social Security we currently have in place, which is basically an intergenerational exchange of debt—each generation pays for the preceding generation’s Social Security payout. The “Pensions” article lays out a more detailed description of the proposed pension plan: Every working citizen has 5% of his/her wages deducted and invested into one or more of their choice of pooled accounts, which contain both foreign and domestic assets. In addition, a subsidy would be provided for people earning too little income to contribute to the pension plan. Coupling this retirement plan with a progressive consumption tax would increase the incentive for individuals to save and, at least, significantly reduce (if not eliminate) the number of retirees living on welfare.
The “Safety Net” article also discusses Medicare and other medical insurance. The author argues in favor of a universal health care system. The argument is something that has torn me in the debate since ObamaCare was “introduced”. Not that I necessarily agree with the type of universal health care system this plan represents, but I do think there is a serious problem when the medical costs incurred by individuals who cannot afford them become the burden of the general population of tax payers. There is also the issue associated with how this debt can negatively affect major medical centers, which is something we have recently faced in Colorado Springs. Personally, I think if health insurance is going to be made mandatory, a two-tiered health care insurance system may be the best way to solve many of the problems we currently deal with. People who wish to remain purchasing their own private health insurance are free to do so and those who wish to participate in a socialized health care system pay higher income taxes to support the insurance “fund”.
There is also the argument that government simply does not have the right to force people to buy insurance. Again, I do not necessarily disagree, however, liability auto insurance is a requirement for every driver in the United States. The idea is simply to be able to cover damages an individual may cause to someone else and/or someone else’s property. The same argument can be said for requiring every person to have health care coverage—without it, the costs incurred for an individual’s medical treatment may become the burden of the general population.
Again, and this point cannot be stressed enough, neither a government-required pension plan or mandatory health care represent situations that fit the definition of a circumstance that justifies government intervention. There are no externalities here. There is not a monopoly power at play. There are no public goods in either scenario. It is simply too easy to argue that government does not have the right to force people to participate in either a pension plan or health care insurance program. I do still wonder, however, if government mandating that each person purchase health insurance (using the two-tiered system discussed above) may alleviate the problems associated with providing medical care to people who cannot pay for it themselves. This idea goes completely against my capitalist nature, it just seems as if having the burden of debt from unpaid medical costs dispersed throughout a population is socialist in itself. There is, of course, always the alternative approach of simply not providing health care to those who cannot afford it, yet, this idea tends to be thought of as “morally wrong” among much of the population, even though it is the most logical way of providing services in a capitalist nation.
I pulled this quote from a friends Facebook page:
"The food stamp program, part of the Department of Agriculture, is pleased to be distributing the greatest amount of food stamps ever… up from 27 million people to over 47 million in the past 3 years.
Meanwhile, the Park Service, also part of the Department of Agriculture, asks us to "Please Do Not Feed the Animals" because the animals may grow dependent and not learn to take care of themselves."
While there is clearly some emotionally charged language in the above quote the general sentiment is, in my opinion, a great way to look at the food stamp program in the United States.
Economically, what happens in the case of food stamps occurs in the model of consumer theory. Initially, a consumer purchases F1 units of food and C1 units of all other consumer goods and services with the point, F1,C1 represented by the intersection of the consumer's budget line and the indifference curve that is tangent to the budget line. When that consumer is given a food stamp subsidy they can suddenly acquire F* units of food at no cost making their budget line horizontal at the point where they spend all of their income on consumer goods and services until point F*. At F* the budget line once again takes on its original slope and runs parallel to the original budget line. The new equilibrium point will be at F2, C2 where an indifference curve is tangent to the new budget line. For ease of understanding, see page 88 by following the accompanying link.
Based off of observations of actual behavior, after given food stamps, a consumer will choose a point of consumption on the budget line somewhere between F* and the point at which C1 intersects the budget line. The presence of food stamps and the options that it gives low wage earners for how to spend their earned income. Assuming the quantity of food stamps given to the consumer meets what they feel are their basic needs such that they value all other goods and services more than they value additional food. If that is the case, they will spend none of their own income on food and only depend on the food stamps to obtain food. Clearly if the stamps were taken away the consumer would have to adjust their spending, but in a world where loans are a potential part of spending on all other goods and services (i.e. the real world) if food stamps were suddenly taken away from a consumer, that consumer may have taken out a loan on which they are required to make payments and as a result may be forced into consuming less than the amount of food necessary for adequate nourishment in order to meet their loan commitments. In this way, food stamps encourage consumers to outspend their actual means.
Another possible result of food stamps directly related to the quote that got me thinking about food stamps is the possibility of a consumer intentionally keeping their income below the yearly determined level necessary to obtain food stamps. This is because they maximize their budget and therefore their ability to purchase foods and other products and services when they are making the exact maximum amount before their food stamp subsidy is taken away. As many people on food stamps who are working are wage earners, not salaried employees, taking a wage increase (or a higher paying job) may move their income line back toward their budget line without the food stamp subsidy from where it would be if they did not take the wage increase (or change jobs) with the food stamps. If it is the case that a wage increase in one's current job or in a new job does not more than compensate for the loss in the food stamp subsidy, the rationally self-interested consumer will choose not to take the wage increase as they will be worse off after they take it. In this case, the food subsidy program encourages consumers to remain reliant on the government program and not make themselves independently better off.
Sunday, March 11, 2012
General Motors and Chryler Bailout
Was General Motor Bailout a Market Success?
From economic perspectives there is a market failure and most know causes of it are namely externalities, public good and monopoly. If economists talk about market failure when should we recognize market success? Well, one would say when there is pareto optimal… It is in this light that I am taking this argument talking about the GM bailout. When it comes to current political debate you will often hear president Barack Obama arguing that the bailout of GM and Chrysler was a must because it was too big to fail. On the same token he contended that if the failure of bailing out GM and Chrysler had happened it would have potentially took other mid and small size businesses down with them. Therefore, it was a bold move when the government used taxpayer money to bail out the American number one automaker that was on the verge of collapse. Needless to say, the stepping in by the government stirred up conflicting sentiments between conservatives and liberals. Obama cogently talks about his vision about GM and Chrysler bailout at first saying “I'm confident that the steps I'm announcing today will mark the end of an old GM, and the beginning of a new GM; a new GM that can produce the high-quality, safe, and fuel-efficient cars of tomorrow; that can lead America towards an energy independent future; and that is once more a symbol of America's success.” In line of the argument, in September 2011, president Obama told a gathering of GM workers in Ohio, "Your survival and the success of our economy depended on making sure that we got the U.S. auto industry back on its feet." In other words, the president got the auto industry "back on its feet."
Conversely to his opponent republican hopeful presidential candidates who took a different approach on the matter, president Obama continue to defend his position in bailing out GM. In fact he assails his opponents based on recent financial report in which GM gained beyond the predicted expectation by beating its best quarterly performance in ten years and its fifth consecutive profitable quarter with 3.2 billion gains. The question at hand is “When is it right for the government to intervene, and how the bailed out of GM is a sustainable success for Obama to be given credit for?” Should we say there has been a pareto optimal in any case?
Nevertheless, the notion of too big to fail is somewhat uneven in the eyes of some critics from republican presidential candidates who continue to fight the involvement of government in free market. For instance Mitt Romney recently argued that the government would not have used taxpayer money to rescue GM and Chrysler rather the government should have let the market run its discourse. Now that report show both GM and Chrysler are financially doing well and thousands of jobs were saved as well as consumer and investors are once again having confidence in both aforesaid automakers, who is right between Obama and his republican opponents like Mitt or Santorum?
Also, in his blog post entitled “Hard Lessons from the Auto bailout” , Daniel J Ikenson, http://www.cato.org/pubs/policy_report/v31n6/cpr31n6-1.html expressed that taxpayers are now majority stakeholders in a company whose success depends on good stewardship from 537 CEOs, most of whom do not consider GM's bottom line a priority. The pursuit of profits and political objectives often work at cross purposes, and many in Congress see GM as a vehicle through which to demonstrate the virtues of green production, regardless of economic viability. Others see GM as a jobs program, also without regard to the economics.
Next, one thing to recognize in the line of the argument is that the role of government in free market will always cause clashes along with different scope of people on what might be right from a business perspective and what might be imperative politically. Thus it is safe to say that the decision for the government to step in free market is hard to forecast its success and hard to induce to fit people preferences. For instance, Robert Jensen, professor at the school of journalism at Houston, Texas criticized Josiah Neeley, policy analyst for the Armstrong Center for Energy & the Environment at the Texas Public Policy Foundation, a nonprofit, free-market research institute based in Austin on role of government causing market failure on grounds of Solyndra - the solar panel manufactures that filed for bankruptcy after getting a $535 million federal loan guarantee - in trying to make a case against government support for alternative energy development.
Thursday, March 01, 2012
I read an article in The Economist concerning Obama’s recent enforcement of the reduction of mercury emissions by power plants. The majority of the article focuses on Obama’s justifications for the regulations, which have little sound economic theory backing them. Although the article attempts to explain the holes in Obama’s reasoning, it lacks economic terminology and analysis, which are some of the components I intend to contribute. I will also point out uses of government force that I feel are inappropriate and unjustified.
To begin with, the article points out that the health benefits associated with the reduction in mercury are instead almost entirely attributed to the reduction in fine particles. This makes perfect sense considering that only trace amounts of mercury are emitted from the burning of coal. It seems entirely possible that Obama (and the EPA) used the “mercury reduction” method as a scare tactic, because of the well-known effects the element has on human health. This seems a pretty poor use of government force.
The primary focus of the article is the seemingly overstated benefits associated with the regulations and where the inflated amount comes from. Essentially, positive externalities are included in the benefit analysis, which would not be a problem if it weren’t for the fact that a full two-thirds of the benefits associated with the regulatory decrease in mercury emissions are attributed to the positive externalities of reducing the emission of fine particles. If such a high amount of the benefits are from reducing fine particles emissions, why not design the regulation directly around that aspect? Again, it seems to be a tactic centered on the fears associated with mercury.
The best example of violating economic principles and exerting unjustifiable government force is Obama’s argument for the mercury regulation, because of the private benefits associated with it. Given that government regulation is only justifiable in the event of a market failure, which only occurs with externalities, the use of public goods, and monopoly market power, using private sector benefits as an excuse for regulation is another example of a poor use of government force. Private costs and benefits would be captured in a market, and therefore, do not require government intervention.
Obama argues that the regulations will bring private benefits in the form of reduced spending on fuel and electricity. Several things are wrong with this argument, the first of which is the fact that consumers bring about equilibrium within the market by demonstrating their own marginal private benefits and marginal private costs through the consumer choices they make. By forcing additional benefits into a market, equilibrium would be distorted.
Another hole in Obama’s argument claiming that consumers will spend less money on fuel and electricity, is that it is more likely that the average consumer will spend the same amount as they previous did, yet because of the rise in prices, will be forced to consume less OR will spend more money than they previously had to in able to consume the same amount.
Obama also tries to defend his position of using government force to essentially create the equilibrium point of marginal private benefit and marginal private cost by using some aspects of behavioral economics, namely the concept of irrationality in consumer choices. Still, irrationality is not a source of market failure, as all consumption choices, whether rational or irrational, still represent consumer preferences. Trying to make choices for consumers by basically telling them that they are too stupid to choose for themselves is yet another example of the improper use of government force.
*I have researched several documents looking for information regarding how the regulations will be implemented and have for some reason not been able to find what I’m looking for. With that in mind, even though there are many aspects of the mercury regulations that do not add up to sound economic practices, the best way to correct the existence of the targeted externality(s) would be by using a corrective tax.