Efficiency and the Role of Government

In the beginning, the field we now call "economics" was called "political economy." The early "political economists" were especially concerned with the relationship between government and markets, and with the extent to which government intervention in markets could be justified. That hasn't changed much. Economists are still concerned about the relationship of government and markets. We are still (among other things) political economists. Since microeconomics is concerned with efficient allocation of resources, we might ask whether it can ever be efficient for government to intervene in markets?

The case for government intervention may not look very good. In the discussions so far, we have learned that (if we make certain assumptions)

1. An efficient allocation of resources is an allocation that satisfies the rule marginal benefit=marginal cost.
2. For each individual, the marginal benefit curve is the demand curve.
3. For each firm, the marginal cost curve is the supply curve.
4. Thus, when quantity supplied equals quantity demanded, we have an efficient allocation of resources.