Unit 3 - Government Microeconomic Intervention Flashcards
Define
Market failure
inefficient allocation of goods and services in the market, when the free market mechanism does not make the best use of scarce resources, by taking into account all of the costs and benefits that are necessary to produce or consume a product.
Describe
Free/Joy rider problem
Individuals have an incentive to avoid paying for the good, hoping others will cover the cost, leading to no one paying for it.
Why is intervention needed?
Market Failure: Private markets may not provide public goods efficiently because they cannot easily charge consumers directly. This leads to under-provision or no provision at all.
Free/Joy Rider Problem: Individuals have an incentive to avoid paying for the good, hoping others will cover the cost, leading to no one paying for it.
Government
.
What are to solutions to market failure?
Provision by the Government: Governments can provide public goods directly, funded through taxation (zero marginal costs).
Subsidies: Governments can subsidise private companies to provide these goods.
Why is government intervention needed for demerit goods?
Market Failure: Consumers may not be fully aware of the negative effects or might ignore them, leading to over-consumption.
• Negative Externalities: Consumption can lead to external costs such as health issues and social problems
Government solutions for demerit goods?
• Taxes: Increase the price to reduce consumption.)
• Regulation: Restrict or ban the use of demerit goods.
• Education: Inform the public about the risks.
Why is intervention needed for merit goods?
Market Failure: Consumers might undervalue the benefits or be unable to afford them, leading to under-consumption.
Positive Externalities: Consumption leads to external benefits such as a healthier and more educated population.
What are the government solutions for merit goods?
Subsidies: Lower the price to encourage consumption.
Provision by the Government: Direct provision to ensure accessibility.
Compulsory Measures: Mandate consumption, such as compulsory education or vaccination programs.
What are price controls ?
Government regulations setting maximum or minimum prices for certain goods and services. This is due to excess demand and supply
Why are maximum prices set?
To make goods more affordable and avoid exploitation of lower income earners
This is a price below equilibrium price
What are the potential issues of maximum prices?
Can lead to shortages and reduced quality of
goods.
Why are minimum prices set?
To ensure liveable incomes eg minimum wage and exploitation of suppliers
This is a price above equilibrium price
What are the potential issues of minimum price?
Can lead to surpluses and unemployment
Why is government intervention needed in terms of price controls?
• Equity: Ensure affordability of essential goods and services.
• Market Stability: Prevent extreme price volatility which can be harmful to consumers and producers.
• Fair Wages: Ensure workers are paid fairly to reduce poverty and income inequality.
What are the government solutions for price controls?
• Enforcement of Price Controls: Legal measures to ensure compliance.
• Subsidies or Support Programs: To support industries or workers affected by price controls.
