Using a Country of Your Choice as an Example, Demonstrate How the Government Seeks to Compensate for Market Failures.

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Question… Using a country of your choice as an example, demonstrate how the government seeks to compensate for market failures.

Name: Alex Dagnall

Word count: 2382

Seminar tutor name: Lawrence Green.
Group Number: 5Q4Z0008/9/Tutorial/A/09

In my essay I am going to talk about the way in which the UK government deals with market failures and the several approaches they can and have taken with the aim of preventing certain aspects of market failure from re-occurring. I will be particularly focusing on the way to government uses taxation as a way of compensating for market failures and the numerous types of market failure that they have to deal with, on a day to day basis.

Firstly, the concept of market failure must be explained; it is when a certain market is left to operate without any form of Government intervention and without this intervention, the allocation of goods and services by this free market is not efficient.

The UK government have many options available to them, in terms of ways they are able intervene in circumstances where market failures occur. However, one of the most commonly used is taxation. Consider any market failure; the over consumption of cigarettes and alcohol, the overuse of roads and aeroplanes. They are all heavily taxed, and taxation is one method I will be focusing on during this essay.

A topic that is becoming more and more pivotal to Governments plans by the decade is the environment. Technology has continued to improve over the years and has enabled us to understand the amount of pollution that’s been produced as a bi-product of our output each year. The importance of this subject was shown not only by Britain, but some of the most powerful nations in the world including USA, China, India and the whole of the EU when the Kyoto treaty was signed in 1997. This was an agreement where all nations involved agreed to legally binding reductions in their emissions of carbon dioxide by 2010. [ (http://www.revisionguru.co.uk/economics/govern9.htm n.d.) ] In order to try and prevent the levels of pollution from increasing in the UK, and also with the intention of them slowly decreasing, the Government have a tool available to them called an environmental tax. An environmental tax is a tax on a good or service that has an unfavourable effect on the environment.

My first example of an environmental tax the UK Government uses in order to compensate for market failures is the London congestion charge. London is the largest city in the UK and of course the capital, therefore this has to have some form of detrimental effect on the environment there, and it does. The roads in London are known to be some of the most chaotic in the world and in order to reduce the amount of people who commute to work by car the government introduced the London congestion charge. It can be described as a fee charged to some types of motor vehicle who enter the congestion charge zone of London at certain times. The charge is £10 per day for between 07:00-18:00 and penalties of between £60 and £180 can be distributed for those who choose not to pay. For a person earning the average salary, paying £50 a week to get to work is a lot of money, not taking into account costs for insurance, tax, and petrol. This provides people with a huge incentive to travel to work each day on public transport as it forces them to pay for some of the negative externalities they are creating, or take an option which is better for the environment and also cheaper for them, which would be public transport. [ (http://tutor2u.net/economics/revision-notes/a2-micro-externalities-policy-options.html n.d.) ] The diagram below can be used to explain how this particular environmental tax works. Once the congestion charge is active, price increases to P1 which shifts the supply curve to the left therefore decreasing quantity demanded. (Quantity demanded being the amount of people wanting to drive their vehicles through London)...
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