Frequently Asked Questions - market failure

FAQs - market failure

Causes of market failure: 

  • merit goods under-consumed (don’t need to use that term)
  • demerit goods over-consumed (don’t need to use that term) 
  • public goods not provided (don’t need to use that term) 
  • information failure 
  • existence of externalities
  • some people have more influence in a market than others
  • existence of monopolies.

This requires a balanced response in which both the advantages and disadvantages of government interventions must be discussed. One sided answer will lead to maximum half the marks.

Advantages of government intervention: 

  • indirect taxes to discourage consumption of demerit goods
  • subsidies to encourage consumption of merit goods 
  • taxation to finance expenditure on public goods  
  • regulations to control private producers, e.g. on pollution and monopolies having market dominance. 

Limitations of government intervention:

  • consumption of demerit goods might be discouraged, but unlikely to end completely given inelastic demand, e.g. for cigarettes and alcohol 
  • consumption of merit goods might be encouraged, but still a limit to extent of increase in consumption 
  • available finance to provide public goods  might be limited/restricted, especially if a large budget deficit 
  • regulations may not be adequately policed/enforced. 

 

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