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A2 Economics. Aim:  Understand government intervention in the market Objectives:  Define government/market failure  Explain the causes of market failure.

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Presentation on theme: "A2 Economics. Aim:  Understand government intervention in the market Objectives:  Define government/market failure  Explain the causes of market failure."— Presentation transcript:

1 A2 Economics

2 Aim:  Understand government intervention in the market Objectives:  Define government/market failure  Explain the causes of market failure  Analyse government policies to correct mf.  Evaluate government policies to correct mf.

3  Define market failure.  How many causes of market failure can you think of?

4 Negative externalitiesPositive externalitiesPublic goodsMerit goodsDemerit goodsImperfect competitionImmobility of factors of productionEquity issues (poverty and inequality)

5  Productive Inefficiency: when firms are not producing at minimum average total cost  Allocative Inefficiency: when resources are not used to produce the goods and services wanted by consumers.

6 Government Legislation and RegulationDirect provision of goods/servicesFiscal policyImproving information

7 Political self-interestImperfect informationUnintended consequencesRegulatory capture

8  The problem created by externalities is that too much or too little is being produced.  The free market fails to produce an efficient allocation of resources.  When governments intervene they wish to ‘internalise the externality’.

9 Consider case of trees being planted. Assume only positive externalities. Therefore MPC = MSC MSC = marginal social cost MPC = marginal private cost MPB = marginal private benefit MSB = marginal social benefit MEB = Marginal external benefits

10  Tree planting produces positive externalities and external benefits.  Means the MSB is greater than the MPB. (Shown by curves).  Maximise private benefit for forestry, they plant Q1 trees where MPC=MPB.  However it is socially optimal at Q2 where MSC=MSB.  Market fails as under production and under consumption occurs shown by Q2 minus Q1.

11 Consider case of coal burning power station. Assume only negative externalities. Therefore MPB = MSB MSC = marginal social cost MPC = marginal private cost MPB = marginal private benefit MSB = marginal social benefit MEC = Marginal external costs

12  Because pollution is discharged during production the MSC is higher than the MPC.  Power station maximises private benefit by producing Q1, where MPC=MPB.  Socially optimal level of output is producing Q2 where MSC=MSB.  Market forces over produce electricity by amount Q1 minus Q2.  Market fails because the power station has produced too much electricity.

13  Tax the polluter  Increasing private costs of production  Incentivise producer to move towards MSC.  Reduce NE.  E.g. Congestion charging Tax Per Unit

14  In groups decide reasons as to why using an environmental tax would be problematic.

15  Difficult to place a monetary value on the environment and externalities. Therefore problems setting monetary value to tax.  Difficult for gov to reduce pollution since they cannot be sure how firms and consumer would react to price and cost changes.

16  Imposing taxes on demerit goods may affect poorer in society more, who consume more demerit goods. Widen inequalities in long run.  May reduce international competitiveness or encourage firms to move to a country where there are no environmental taxes e.g. India.

17  Regulate the markets heavily, setting pollution quotas.  Create a market, e.g. Pollution permits  Raises money for government and extends property rights.

18  How could these government intervention methods result in government failure?


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