Market failure and government intervention

Topics: Externality, Market failure, Public good Pages: 10 (1244 words) Published: April 19, 2015
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Market failure and Government intervention
Answers

Rifdhi Azad – SQA 03

QUESTIONS

1. Explain what is meant by the term ”market failure”. In your answer you must refer to the role of government in relation to each of the following a. Public Goods
b. Merit Goods
c. Externalities
d. Imperfect competition
2. Select one current government policy on completion and
a. Explain the policy selected
b. Identify and describe the instruments used to achieve your chosen policy c. Evaluate the success or failure of your chosen policy in relation to its use within the UK

Contents
1.Market failure and government intervention2
Public goods2
Merit goods2
Externalities3
Positive externalities3
Negative externalities3

1. Market failure and government intervention

Market failure is where a market fails to develop, or when they fail to allocate resources efficiently. Economics Online Ltd. Government interferes to solve the below failures,

Public goods

Free market fails to provide public goods without a price tag to it. There is no proper way to include a price to public good. Definition: A public good (or service) may be consumed without reducing the amount available for others, and cannot be withheld from those who do not pay for it. Public goods (and services) include economic statistics and other information, law enforcement, national defense, parks, and other things for the use and benefit of all. No market exists for such goods, and they are provided to everyone by governments. Government interferes and produces public goods and financed through taxation of individuals or businesses. Merit goods

Merit goods are those goods and services supplied by both private and public market. There is an opportunity cost providing theses goods to the consumers. Consumption of these goods will generate a positive externality such as Education, Health care. (Where the social benefit from consumption exceeds the private benefit) Free market includes a price tag to these goods & these goods are essential for the less income category and which they cannot afford at a high cost (Price). So there less supply by the private sector which is including a high price and everyone cannot access to it. Market is system is not providing the optimum level of consumption, whenever the market is not providing the optimum result that is a failure – of allocating resources. To correct this Government provides Merits goods along with the private sector. Education – Private schools, Semi Government schools, Government schools

Externalities

These occur when a third party is affected by the decisions and actions of producers or consumers. (Positive or Negative) Free market doesn’t consider these externality effects to the third party. Producers are interested to maximize their profits which mean producers only concern about their own self-interest and not the social cost or private benefits. Consumers only consider about their own benefits and not social cost or third party affect. Positive externalities

*Positive externalities in consuming
A positive externality is a benefit that is appreciated by a third-party as a result of an economic transaction. *Positive externalities in producing
A positive production externality occurs when a third party gains as a result of production. Nevertheless, those third parties who benefit cannot be charged, so there is only an incentive to supply to those who can be charged.

Negative externalities
*Negative externalities in consuming
When certain goods are consumed, such as demerit goods, negative effects can arise on third parties. * Negative externalities in production
A negative externality is a cost that is suffered by a third party as a result of an economic transaction Government interferes to solve this by,
Impose Tax on the polluting the air
Issuing license to polluters the air – at a high cost...
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