Classification o f Factor Policies

If competitive market conditions prevailed, the PAM would use the same factor prices in evaluating private and social costs. But this coincidence is a rare event. Private market prices differ from their social values for a number of reasons. Commodity market distortions affect the factor markets indirectly, because changes in product prices alter the marginal value products of inputs. More important are direct government interventions in the factor markets. Factor policies can be responses to dissatisfaction with the income distribution consequences of efficient outcomes. By altering the prices of factors, policy-makers hope to alter the share of total income received by the factor. Factor policies may also be a component of macroeconomic policy; for example, credit policies are used often to regulate the distribution of financial capital between the private and public sectors. Alternatively, private and social factor prices can diverge because of noncompetitive or natural phenomena, and efficient policies are introduced to establish a coincidence between private and social values.