reasons for government intervention in markets chapter 12 Flashcards
market failure
when the free market does not make the best use of scarce resources
what is the ideal situation of the market
When markets work efficiently, they produce the best allocation of resources.
when does market failure occur
Market failure occurs when the price mechanism fails to take into account all of the costs and benefits that are necessary to produce or consume a product.
why are markets not efficient
Markets are not perfect due to inefficient production and consumers not having perfect information to be able to make informed choices.
situations where market failure occurs include
lack of public goods
underproduction of merit goods
overconsumption of demerit goods
information failure
free rider problem of public goods
people can enjoy the use of a public good without contributing towards its cost. caused because public goods are non excludable
why are private sectors not interested in providing public goods
there is no opportunity to make a profit from their investment thus the government has to fund it out of tax revenue and provided free of charge
whys is opportunity cost an issue with public goods
the funding for public goods is competing with other types of government spending, often in countries with a modest tax base.
how do public goods cause market failure
public are a part of market failure because they are non excludable and non rival. the private market has no reason to provide such goods hence market failure
why are demerit goods overprovided
they tend to be overprovided because consumers lack full and proper information about goods. this is why governments have increasingly intervened in this particular market
what happens if government does not intervened demerit goods
individual decisions are distorted as a result of failing to take into account the resulting loss of benefit to society - this loss is either not understood at all, or only partially understood. Hence, there is likely to be an ‘over-consumption’ of demerit goods.
problem with merit goods provided by the private sector
the quantity supplied is less than what is required. access is restricted for those who can afford to pay. leads to under consumption
how do government control prices
governments set maximum prices, which means sellers of the good cannot sell it legally at any price above it. Governments support farmers’ incomes by setting a minimum price or price floor for key agricultural products
what is the effect of a minimum price
The effect of a minimum price is to raise the price of a crop above the equilibrium market price. In this way, the income of farmers is protected and the government can be more certain about the security of future supplies, as there is likely to be less need to buy crops on the international market. The downside is that consumers are likely to be worse off, since the price is now above the equilibrium and a smaller quantity is being traded. It can also be argued that this represents an inefficient use of resources
