how government compensate for market failure
1. Introduction
The market forces of demand and supply lead to equilibrium price and quantity that can be used to allocate sources effectively in many of the markets. At times they fail to deliver the best level of output for society. The government intervenes using various methods to correct market failure. This report details the six different types of market failure which can occur in the UK in addition to critically detailing how the government attempts to correct market failure.
2. Externalities
According to Samuelson (1954) ‘Externalities create a divergence between the private and social costs of production’. Social costs are the production cost of a product or service including third party costs; in the event of a negative externality the social costs are much greater than private costs i.e. pollution.
Externalities are external costs and benefits which arise during economic activity but which are not considered by the buyers and sellers involved as they effect third parties only. Ignoring external costs and benefits can lead to the wrong level of output in the market.
Negative externalities, occasionally referred to as external costs, are the costs that separate social and private costs. They are the costs paid for by third parties, which is usually society as a whole. If negative externalities are left to the market mechanism it could lead to over production. Chivian and Bernstein (2008) concluded, ‘soft drinks in large quantities are unhealthy and could lead to medical problems’. This would increase the medical costs for the government, to tackle this issue they could tax soft drinks to discourage use in addition to elevating such charges from healthy drinks consequently providing a cheaper and healthier alternative.
Consumers can create externalities by consuming certain goods or services.
• Pollution from privately owned cars or taxis
• Public damage caused by alcohol abuse
• Litter on streets
The UK government address these negative
The market forces of demand and supply lead to equilibrium price and quantity that can be used to allocate sources effectively in many of the markets. At times they fail to deliver the best level of output for society. The government intervenes using various methods to correct market failure. This report details the six different types of market failure which can occur in the UK in addition to critically detailing how the government attempts to correct market failure.
2. Externalities
According to Samuelson (1954) ‘Externalities create a divergence between the private and social costs of production’. Social costs are the production cost of a product or service including third party costs; in the event of a negative externality the social costs are much greater than private costs i.e. pollution.
Externalities are external costs and benefits which arise during economic activity but which are not considered by the buyers and sellers involved as they effect third parties only. Ignoring external costs and benefits can lead to the wrong level of output in the market.
Negative externalities, occasionally referred to as external costs, are the costs that separate social and private costs. They are the costs paid for by third parties, which is usually society as a whole. If negative externalities are left to the market mechanism it could lead to over production. Chivian and Bernstein (2008) concluded, ‘soft drinks in large quantities are unhealthy and could lead to medical problems’. This would increase the medical costs for the government, to tackle this issue they could tax soft drinks to discourage use in addition to elevating such charges from healthy drinks consequently providing a cheaper and healthier alternative.
Consumers can create externalities by consuming certain goods or services.
• Pollution from privately owned cars or taxis
• Public damage caused by alcohol abuse
• Litter on streets
The UK government address these negative
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