Economic Issu Assessment Outcome Iii

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Question 1
Explain what is mean by the term ‘market failure’. In your answer you must refer to the role of government in relation to each of the following. * Public goods
* Merit goods
* Externalities
* Imperfect competition

Market failure is a concept within economic theory describing when the allocation of goods and services by a free market is not efficient. Government intervention occurs when markets are not working optimally i.e. there is a Pareto sub-optimal allocation of resources in a market/industry. In simple terms, the market may not always allocate scarce resources efficiently in a way that achieves the highest total social welfare. Market failure can occur for number of reasons.

EXAMPLES OF POTENTIAL MARKET FAILURE
There are plenty of reasons why the normal operation of market forces may not lead to economic efficiency. Public Goods
Public Goods not provided by the free market because of their two main characteristics * Non-excludability where it is not possible to provide a good or service to one person without it thereby being available for others to enjoy * Non-rivalry where the consumption of a good or service by one person will not prevent others from enjoying it Examples: Street lighting / Lighthouse Protection, Police services, Air defence systems, Roads / motorways, Terrestrial television, Flood defence systems, Public parks & beaches Because of their nature the private sector is unlikely to be willing and able to provide public goods. The government therefore provides them for collective consumption and finances them through general taxation. Merit Goods

Merit Goods will be underprovided if left to market forces, public goods may not be supplied at all. This is because it is difficult to identify who benefits, from public goods and to stop those who directly pay for them from being able to consume them. Examples: Health services, Education, Work Training, Public Libraries, Citizen's Advice,...
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