Introduction

Microeconomic policy consists of measures to:

1. (a) ensure the existence and operation of markets when they are able to produce the desired optimum

2. (b) correct the many inefficiencies of the actual operation of markets shown by microeconomic theory with reference to the different concepts of static and dynamic efficiency

3. (c) ensure an equitable personal or household distribution of wealth and guarantee the supply of merit goods.

Policies aimed at ensuring the existence and operation of markets (point (a)) represent the minimal state, or what the strongest advocates of the market feel are the (minimal) functions that should be performed by the government. An essential part of public policy to make the market work is attributing property rights. In capitalist systems, these are usually assigned to individuals, who tend to pursue profit (sometimes nonprofit) objectives. In some cases property rights are assigned to the state and other public bodies, giving rise – when they concern business organisations – to public enterprises. We discuss these policies in the remainder of this chapter.

Corrective policies (point (b)) are used to compensate for the existence of externalities, public goods, transaction costs and asymmetric information (even in a hypothetically perfect market), as well as for divergencies in actual markets from the ideal model of perfect competition (in particular, those caused by economies of scale, collusive agreements and entry and exit barriers). In all these cases the target is often – but not always – allocative efficiency.