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:
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.
Define market failure. How many causes of market failure can you think of?
Negative externalitiesPositive externalitiesPublic goodsMerit goodsDemerit goodsImperfect competitionImmobility of factors of productionEquity issues (poverty and inequality)
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.
Government Legislation and RegulationDirect provision of goods/servicesFiscal policyImproving information
Political self-interestImperfect informationUnintended consequencesRegulatory capture
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’.
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
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.
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
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.
Tax the polluter Increasing private costs of production Incentivise producer to move towards MSC. Reduce NE. E.g. Congestion charging Tax Per Unit
In groups decide reasons as to why using an environmental tax would be problematic.
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.
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.
Regulate the markets heavily, setting pollution quotas. Create a market, e.g. Pollution permits Raises money for government and extends property rights.
How could these government intervention methods result in government failure?