12 Reasons for Government Intervention in Markets

Question 1

Market Failure

Answer 1

Market failure is an inefficient use of allocation of goods and services in the market. Market failure is when the free market does not make the best use of scarce resources.

Question 2

Public goods

Answer 2

Service that is made available to all members of the society. It is funded by the government through tax revenue from taxation. Examples are: police force, national defence, fire protection & street lights.

Question 3

Demerit Goods

Answer 3

Considered undesirable goods for consumers that tend to be overprovided which therefore causes an overconsumption in the free market.
Main reason for this is that consumers lack full and proper information on demerit goods such as tobacco.

Question 4

Merit Goods

Answer 4

Services that the public sector provides free or cheaply because the government wishes to encourage their consumption. This is a result of information failure to the consumers.

Question 5

Price ceilling

Answer 5

Government imposed price control, or limit, on how high a price is charged for a product or service.

Question 6

Why do governments use price ceilings

Answer 6

To protect those on low incomes