RI H1 Economics Lecture Notes 3 Market Failure and Government Intervention

RAFFLES INSTITUTION YEAR 5 H1 ECONOMICS 2018 MARKET FAILURE AND GOVERNMENT INTERVENTION 1 Introduction 2 Efficiency and Equity in Relation to Markets 2.1 How the free market leads to efficient allocation of resources 2.2 Market Failure 2.2.1 Externalities 2.2.1.1 Negative externalities 2.2.1.2 Positive externalities 2.2.2 Demerit & Merit Goods 2.2.3 Public Goods 3 Government Intervention 3.1 Rationale for government intervention 3.2 Taxes and Subsidies (Market-oriented Policies) 3.3 Government Legislation and Regulation 3.4 Direct Government Provision 3.5 Joint Provision 3.6 Education and Campaigns 4 Application to the Singapore Economy 4.1 Solving Traffic Congestion and Air Pollution 4.2 A Closer Look at Education in Singapore 4.3 Examining Healthcare in Singapore Appendix: A: Assessment of the Free Market Economy B: The EU Emissions Trading System References 1 Dornbusch, Begg & Fischer. Economics. 7th Edition. Chapter 15. 2 Sloman, J. Economics. 6th Edition, Hertfordshire: Prentice Hall. Chapter 10 & 11. 3 Gwartney, Stroup & Sobel. Economics: Private and Public Choice. 9th Edition. Dryden. Chapter 5 4 Lipsey, Courant, Purvis & Steiner. Economics. 10th Edition. HarperCollins. Chapter 20. 5 Economics in Public Policies, The Singapore Story, Tan Say Tin et al. Marshall Cavendish, Chapter 3, 6 & 7 Lecture Objectives At the end of this series of lectures, students should be able to: • explain what is meant by allocative efficiency • explain the meaning of market failure • explain the causes of market failure: oexplain externalities as a source of market failure oexplain the concepts of merit and demerit goods and why they result in market failure oexplain why public goods are not provided by the free market with respect to the characteristics of these goods. oexplain how imperfect information can lead to market failure • evaluate policies to correct the various sources of market failure @dream

Year 5 H1 Lecture Notes 2018 Why Markets Fail A. MARKET FAILURE 1 INTRODUCTION Markets do many things well, but they do not do everything well. Most people’s practical and moral sense argue for some degree of state intervention to mitigate areas in which markets do not function well and in which state intervention can improve the general social welfare. In this series of lectures, we identify and explain the microeconomic problems that call for and justify the need for government intervention. Microeconomic problems generally fall into two broad categories: (i) allocative inefficiency and productive inefficiency that arise as a result of market failure and (ii) income inequality that arises as a result of letting the market determine the prices of resources and goods. From the point of view of society’s sense of justice and fairness, the free market distribution is inefficien