Market failure and government intervention
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Lektionsnotizen
What market failure is
- Market failure concerns inefficient resource allocation relative to the relevant social costs and benefits. A particular price, a business loss or a firm leaving the market is not alone sufficient evidence; ordinary competition can move resources between uses.
- Identify the mechanism, such as a third-party effect, relevant information problem, public-good funding issue or market power, then explain the resulting gap. Inequality also raises distributional concerns, but distinguish an efficiency claim from a judgement about fairness.
Identify a market-failure mechanism
Types
- An externality affects third parties outside the private decision. Negative external costs can lead to excessive activity in a simple model; positive external benefits can lead to too little. Private harm or gain to the decision-maker is distinct even when information failure is present.
- Fictional positive-spillover extension: MPB = 10 − 0.1Q, MSB = 12 − 0.1Q and MC = 2 + 0.1Q give private Q40 and the efficient intersection Q50. This assumes known curves, £2 marginal external benefit and no external cost; it is not measured education or health data.
- Merit and demerit classifications involve a judgement about appropriate consumption, potentially informed by underestimated benefits or harms and access barriers. These labels are not identical to externality classifications. Information failure concerns relevant missing, misleading or asymmetric information that distorts choices rather than an assumption everyone must know everything.
A fictional positive spillover
Government intervention
- Choose interventions for the mechanism: suitable taxes can internalise costs, targeted subsidies or public supply can support benefits or access, and information may address misunderstanding. Regulation, monitoring and allowance systems can constrain activity, with different costs and incentives.
- Direct provision means public production in the definition used here, distinct from paying a private contractor or subsidising private sales. A tax does not automatically match external damage; a subsidy is not always fully passed to users. Evaluate coverage, compliance, opportunity costs and distribution.
Tools target different mechanisms
Government failure
- Government failure concerns intervention worsening allocation relative to an appropriate feasible benchmark, after relevant costs and benefits. Poor information, unintended incentives or weak delivery may contribute, but spending or administration alone is not proof.
- A binding maximum price below equilibrium can generate a shortage: in fictional demand P = 10 − 0.1Q and supply P = 2 + 0.1Q, P4 gives Qd60 and Qs20, a 40-unit gap. Queues, rationing or unlawful transactions are possibilities, not inevitable results of every control.
A fictional binding maximum price
Public goods and the free-rider problem
- A pure public good is non-rival and non-excludable over the relevant range. One user does not reduce another’s benefit, and excluding non-contributors is infeasible or prohibitively costly. Ownership, public funding or zero price alone does not establish the classification.
- Voluntary funding can be too low because people benefit without contributing. Collective agreements, donations, linked charges or public finance may support provision, so a market or community never supplying any public benefit is an overstatement. State the assumptions when classifying street lighting, defence or flood-protection benefits.
Classify characteristics, not funding
Evaluate costs, benefits and evidence
- Specify the intended improvement and compare alternatives using evidence about response, enforcement, administration, access and distribution. Inelastic demand can limit the immediate quantity response to a tax without making that response zero, and effects may change over time.
- Fictional matched period totals: £100 private cost + £30 external cost = £130 social cost; £160 private benefit + £20 external benefit = £180 social benefit; net social benefit £50. Use consistent units and distinguish marginal from total values. Transfers and repeated descriptions of the same impact should not be counted as extra social costs.
A fictional social accounting example
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Übungsfragen
Gratis-Vorschau — 8 von 36 Fragen. Registriere dich, um alle zu sehen.
1.What is market failure?
Easy- Awhen the free market allocates resources inefficiently
- Bwhen markets work perfectly
- Cwhen government fails
- Dwhen prices fall
2.What is an externality?
Easy- Aa private cost
- Ba price
- Ca profit
- Da third-party cost or benefit not fully reflected in the private decision
3.What is a positive externality?
Easy- Aa private cost
- Ba tax
- Ca benefit to third parties
- Da cost to third parties
4.What is a public good?
Easy- Aa luxury
- Bnon-excludable and non-rival
- Cexcludable and rival
- Dprivately owned
5.What is a merit good?
Easy- Aa good judged under-consumed relative to a desirable level
- Bharmful but over-consumed
- Ca public good
- Dan inferior good
6.What is a demerit good?
Easy- Abeneficial but under-consumed
- Ba public good
- Ca free good
- Da good judged over-consumed relative to a desirable level
7.What is the free-rider problem?
Easy- Ano one benefits
- Beveryone pays
- Cpeople benefit without paying
- Dpeople pay twice
8.What is non-excludable?
Easy- Ait is expensive
- Bexcluding non-contributors is infeasible or prohibitively costly
- Cyou can stop them
- Dit is private
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