bab 3 Role of Government

Political Systems

-Democracy
Government by the people, exercised either directly or through elected representatives.
– Totalitarianism
Government in which one person or political party exercises absolute control over all spheres of human life and opposing political parties are prohibited.

Democracy

• Safeguards to protect a democracy:
– Right to freedom of expression, opinion, and organization.
– A free media.
– Regular elections in which all eligible citizens are allowed to vote.
– Universal adult suffrage.
– Limited terms for elected representatives.
– A fair court system independent of the political system.
– A nonpolitical state bureaucracy.
– A nonpolitical police force and armed service.
– Relatively free access to state information.

Totalitarianism

• 4 major forms:
– Communism
• Collectivism is achieved through total dictatorship.
– Theocratic
• Political power is influenced by religious principles.
– Tribal
• A political party representing the interests of a particular tribe monopolizes power.
– Right-wing
• Generally permits individual economic freedom, but restricts political freedom to prevent the rise of communism.

Economic Systems

• Market Economy:
– All productive activities are privately owned.
• Command Economy:
– Goods and services produced, their quantity, and prices are determined by the government.
• Mixed Economy:
– Parts of the economy are left to private ownership and free market mechanisms while other sectors are state-owned and have government planning.
• State-Directed Economy:
– The state plays a significant role through its “industrial policy” and setting national goals.

Mengapa pasar gagal?

• Mengapa pasar gagal?
Kegagalan pasar terjadi bila dalam pasar bebas muncul penyimpangan yang melanggar syarat-syarat marjinal bagi tercapainya kondisi pareto optimal.

• Kegagalan Pasar:
“Suatu situasi dimana solusi pasar tidak sesuai dengan optimalitas pareto” (efisiensi alokasi sumber daya)

Market Failures & Redistribution:

a rationale for government activity
• A. Market Failures :
• Failure of Competition
• Public Goods
• Externalities
• Incomplete Markets
• Information Failures
• Resource immobility
• Unemployment, Inflation, and Disequilibrium (great depression, crisis, etc)

• B. Redistribution (sass) and Merit Goods (seat belts)


Systematic Failure of the Government :
• The consequences of many actions are complicated and difficult to foresee
• The government has only limited control over these consequences
• Those who design the legislation have only limited control over the implementation of the program
• The elected legislators not necessarily ensure the benefit of the public interest

The Inefficiency of Monopoly

PUBLIC POLICY TOWARD MONOPOLIES

• Basically Government responds to the problem of monopoly in one of four ways.
– Making monopolized industries more competitive
– Regulating the behavior of monopolies (price regulation)
– Turning some private monopolies into public enterprises (nationalizing the monopoly)
– Removing artificial barriers to entry and making market contestable

Making monopolized industries
more competitive

– They allow government to prevent mergers.
– They allow government to break up companies.
– They prevent companies from performing activities that make markets less competitive

Regulating the behavior of monopolies. (price regulation)

• Government may regulate the prices that the monopoly charges.
– The allocation of resources will be efficient if price is set to equal marginal cost.

Marginal-Cost Pricing for a Natural Monopoly

Turning some private monopolies
into public enterprises (nationalizing the monopoly)
Rather than regulating a natural monopoly that is run by a private firm, the government can run the monopoly itself (e.g. in the United States, the government runs the Postal Service).

Removing artificial barriers to entry
and making market contestable

Changing the degree of competition in a market by reducing the barriers to entry; on the other hand, the behavior of a dominant company can be changed through the threats of potential competition

Public Goods
Public Goods
• Markets would not provide such goods and services at all!
• Non- excludability – Person paying for the benefit cannot prevent anyone else from also benefiting - the ‘free rider’ problem
• Non- rivalry – Large external benefits relative to cost – socially desirable but not profitable to supply!

Informasi yang Tidak Simetris
(Asymmetric Information)
A difference in access to relevant knowledge is called information asymmetry ……. Situasi dimana pembeli dan penjual memiliki informasi yang berbeda mengenai sebuah transaksi..…..

Contoh: Jika seorang produsen mengetahui lebih banyak mengenai kualitas dan kondisi produk yang akan dijualnya dibanding konsumen/ pembeli, maka produsen akan menawarkan garansi terhadap produk tersebut.

Bagaimana ‘asymetric information’ dapat menyebabkan kegagalan pasar?

Asymmetric Information
Ketidakpastian Kualitas Produk dan Lemons’ Problem

……. Lemons’ problem muncul ketika informasi yang tidak simetris menyebabkan barang berkualitas buruk mendorong keluar barang berkualitas baik sehingga tidak dapat bertahan dalam pasar……

Contoh: - mobil bekas, asuransi kesehatan, kartu kredit, kontraktor bangunan, jasa dokter, barang antik, restoran.


Asymmetric Information

• Adverse selection
• Principal-Agent Problem
• Moral Hazard


Moral Hazard
….. terjadi ketika satu pihak yang tindakannya tidak diamati akan mempengaruhi peluang atau besarnya suatu pembayaran yang berhubungan dengan tindakan tersebut….
Contoh:
 Jika seseorang mengasuransikan rumahnya dari risiko kemalingan, maka orang tersebut mungkin akan bersikap lebih ceroboh dalam menjaga rumahnya.
 Jika seseorang menutup asuransi kesehatan secara penuh, maka orang tersebut mungkin akan lebih sering ke dokter dari pada yang sebenarnya diperlukan.
 Jika seorang pekerja tidak diawasi, maka pekerja tersebut mungkin akan menghasilkan kinerja yang lebih rendah dari kemampuan yang dimiliki.

Principal-Agent Problem
…. Muncul ketika ‘agent’ atau pekerja (direksi, karyawan) mengejar tujuan mereka sendiri walau berseberangan dengan tujuan ‘principal’ atau pemilik.

Adverse selection
muncul ketika produk dengan kualitas yang berbeda dijual pada tingkat harga yang sama (single price) karena pembeli atau penjual tidak memiliki informasi yang cukup untuk mengetahui dengan tepat kualitas yang sebenarnya dari produk ketika terjadi transaksi.
Akibatnya, pasar akan dibanjiri oleh produk berkualitas rendah dan sebaliknya hanya sedikit produk berkualitas baik yang dijual di pasar.


Resource Immobility

– Factors are not fully mobile
– Labour immobility – geographical and occupational
– Capital immobility – what else can we use the Channel Tunnel for?
– Land – cannot be moved to where it might be needed – e.g. London and South East!

Externalities
The effects of a decision by consumers and producers that has an impact on a third party
– Positive Externalities – beneficial effects on third parties
– Negative Externalities – costs incurred by third parties


External Benefits
Positive and Negative Externalities
• Costs and benefits in production:
• External costs in production – where MSC = MSB – MPC
– e.g. – air and water pollution, congestion, housing development on green belt areas, destruction of hedgerows and wildlife, noise, pollution, anti-social behaviour, crime.
• External Benefits in production – where MSC < MPC
– e.g. – human resource development, research and development in industry
Positive and Negative Externalities
• Costs and benefits in consumption:
• External costs in consumption – where MSB < MPB
– e.g. – passive smoking, litter, noise, anti-social behaviour
• External benefits in consumption – where MSB > MPB
– e.g. preventive health care – vaccinations, public transport, attractive gardens, bathing regularly!

Positive and Negative Externalities
• External costs – socially efficient output is less than current output
• External Benefits – socially efficient output is greater than current output
• Socially Efficient output is where MSC + MPC = MSB + MPB
External Costs
External Benefits
Role of Government
When externalities are significant and private solutions are not found, government may attempt to solve the problem through . . .
– command-and-control policies (regulations)
– market-based policies. Government uses taxes and subsidies to align private incentives with social efficiency.Pigovian taxes are taxes enacted to correct the effects of a negative externality.


The Equivalence of Pigovian Taxes and Pollution Permits
The Equivalence of Pigovian Taxes and Pollution Permits
Incomplete Market
(Pasar tidak Lengkap)
Suatu pasar dikatakan lengkap apabila pasar tersebut menghasilkan semua barang dan jasa yang dihasilkannya lebih kecil daripada harga yang mau dibayar oleh masyarakat.

Ada beberapa jenis jasa yang tidak diusahakan oleh pihak swasta dalam jumlah yang cukup walaupun biaya penyediaan jasa tersebut lebih kecil daripada apa yang mau dibayarkan oleh masyarakat. MIsalnya pada asuransi untuk menghadapi resiko tertentu. Oleh karena itu pemerintah harus menyediakan jasa tersebut.
Merit Goods
• Inadequate Provision:
• Merit Goods and Public Goods
– Merit Goods – Could be provided by the market but consumers may not be able to afford or feel the need to purchase – market would not provide them in the quantities society needs
– Sports facilities?


Merit Goods
• Merit Goods
• Education – nurseries, schools, colleges, universities – could all be provided by the market but would everyone be able to afford them?
Systematic Failure of the Government :
• The consequences of many actions are complicated and difficult to foresee
• The government has only limited control over these consequences
• Those who design the legislation have only limited control over the implementation of the program
• The elected legislators not necessarily ensure the benefit of the public interest
Problems Associated with How Government Determines Public Policy
– The Condorcet Paradox
– Arrow’s Impossibility Theorem
– The Median-Voter Theorem
– Self-interested Politicians
The Condorcet Voting Paradox
Arrow’s Impossibility Theorem
• Arrow’s impossibility theorem is a mathematical result which shows that, under certain conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences.
Median Voter Theorem
The median voter theorem is a mathematical result that shows that if voters are choosing a point along a line and each voter wants the point closest to his most preferred point, then majority rule will pick the most preferred point of the median voter.
Self-interested Politicians
• Some politicians are motivated by self-interest.
• Some politicians sacrifice the national interest to solidify their base of voters.