The Use of Cars Causes Market Failure. to Achieve an Efficient Use of Resources It Would Be Better If Governments Intervened to Affect Both the Production and the Use of Cars. Explain the Meaning of the Terms ‘Market

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The use of cars causes market failure. To achieve an efficient use of resources it would be better if governments intervened to affect both the production and the use of cars. Explain the meaning of the terms ‘market failure’ and ‘the efficient use of resources’ and analyse whether economic theory can be used to support this argument. [25]

Market failure exists when the operation of a market does not lead to economic efficiency. It is a situation where a free market does not produce the best use of scarce resources. Typical examples are when externalities are present, when there is monopoly power or where it is necessary for public and merit goods to be provided by the government or even when there is possible excessive profits or the need for very large investments. The strongest case for government intervention in the micro economy arises from market failure.

In order for resources to be efficiently used, it must be allocatively and productively efficient. Productive efficiency has to do with producing with the least possible scare resources. Allocative efficiency has to do with the production of the products that are most wanted. Efficient use of resources is termed as economic efficiency, and this is said to exist when it could be judged that all of our scare resources are being used in the “best” possible way. It represents the best possible solution to the economic problem. It is only realized when both allocative and productive efficiency co-exists. This is therefore known as optimum use of resources. Market failures have negative effects on the economy because an optimal allocation of resources is not attained. In other words, the social costs of producing the good or service (all of the opportunity costs of the input resources used in its creation) are not minimized, and this results in a waste of some resources.

Government can intervene through taxation, subsidies and regulation. Goods that produce negative externalities can be taxed to...
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