SAJC 2023 JC1 H2 Market Failure 2 Lecture Notes

Market Failure and Government Intervention II © St Andrew’s Junior College Page 1 Economics Department ST ANDREW’S JUNIOR COLLEGE JC 1 H2 ECONOMICS 2023 Market Failure and Government Intervention (Part 2) In the previous topic, Firms and Decisions - Market Structures, we have learnt that the characteristics of the different types of market structure determine a firm’s behaviour or conduct. This behaviour in turn affects the firm’s performance. You may have observed the negative impacts that firms exhibit because of their market power. In this topic, we will learn how the following market imperfections cause markets to fail: • Factor Immobility; and • Information Failure Market failure provides the justification for government i ntervention in the free market. The decision-making process with the government as the main focal point can thus be used as an approach to gain a better appreciation of the complexities of decision- making at the governmental level. Learning about market failure will deepen our understanding of the complexities in the real world, equip us with the tools to analyse how the real world works and predict the impact that decisions have on firms, industries and the nation. We will be equipped as informed citizens to critically examine the impact of market operations from multiple perspectives and recommend checks for public interest.

Market Failure and Government Intervention II © St Andrew’s Junior College Page 2 Economics Department MARKET FAILURE AND GOVERNMENT INTERVENTION 1. MARKET FAILURE AND GOVERNMENT INTERVENTION IN THE MARKET ............................ 5 1.1 Immobility of Factors of Production .................................................................................................... 6 1.1.1 Government Intervention to Deal with Immobility of Factors of Production .................................................. 8 1.2 Information Failure ................................................................................................................................ 10 1.2.1 Imperfect Information in Imperfect Competition ...................................................................................................... 10 1.2.2 Asymmetric Information ....................................................................................................................................................... 10 2. APPENDIX ................................ ................................ ................................ ................................ ................. 26 2.1 Appendix 1: Medishield Life ....................................................................................................................... 26 2.2 Appendix 2: More about the 3Ms .............................................................................................................. 27 2.3 Appendix 3: Singapore’s CareShield Life .............................