This course discusses basic questions in economics like: When can markets be inefficient? When do such inefficiencies generate a rationale for the government to intervene? By what methods should the government intervene?
We begin the course by reviewing the basic welfare theorems that suggest markets should work well. The first welfare theorem suggests market outcomes are always Pareto efficient – there are no policies the government can do to make everyone better off relative to what the market allocation provides. The second welfare theorem suggests that any desired Pareto efficient outcome can be achieved by the government through an appropriate set of lump-sum transfers. Taken together, these two theorems have been traditionally hailed as rationales for the absence of government intervention in markets.
Yet, there are many conditions under which the assumptions underlying these fundamental theorems fail. We discuss the workings of markets and rationales for government intervention a wide range of settings, including equality of opportunity and intergenerational mobility in the U.S., insurance markets and the Affordable Care Act, the rise in top 1% inequality and implications for taxation of labor and capital, patent protection and innovation, high frequency trading, and government bailouts during the financial crisis. The goal is to generate principled discussion about the potential market failures operating in these settings, to critique the current methods of government intervention, and to discuss the pros and cons of alternative policies.