SAJC 2023 JC1 H2 Market Failure and Government Intervention (Part 1) Uploaded

In the chapter of the Central Problem of Economics, we learnt that scarcity requires rational choices to be made about how resources are to be allocated to the production and consumption of goods and services. In a market -based economy, the price mechanism is assumed to allocate resources efficiently. In such an ideal model of the economy, firms are assumed to have perfect information and there is perfect factor mobility. In this topic, we will explore how in the real world, markets may not work efficiently because the assumptions of an ideal economy do not hold true. This leads to the failure of the market to allocate resources efficiently. This is termed as ‘market failure’. Market failure provides the justification for government intervention 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 appreci ation of the complexities of decision -making at the governmental level. Learning about market failure will deepen our understanding of real -world complexities, equip us with the tools to analyse and predict the impact that decisions have on firms, indust ries and the nation. The knowledge, skills and values that we develop will help us to appreciate policies in Singapore to address market failure and encourage us to take an active interest in Singapore’s economy as contributing and concerned citizens. ST ANDREW’S JUNIOR COLLEGE JC 1 H2 ECONOMICS 2023 Market Failure and Government Intervention (Part 1)

Market Failure and Government Intervention Part 1 © St. Andrew’s Junior College Economics Department 2 1. GOVERNMENT’S MICROECONOMIC OBJECTIVES ................................ ................................ ....... 6 1.1. Efficiency and Equity in Markets ................................ ................................ ................................ ........... 6 1.2. Microeconomic Goals of Government ................................ ................................ ................................ .. 7 1.2.1. Efficiency ................................ ................................ ................................ ................................ ................ 7 1.2.2. Equity ................................ ................................ ................................ ................................ .................... 10 2. MARKET FAILURE AND GOVERNMENT INTERVENTION IN THE MARKET ................................ ... 12 2.1. Presence of Negative Externalities and Government Intervention ................................ ....... 13 2.1.1. Negative Externalities in Consumption ................................ ................................ ................... 16 2.1.2. Negative Externalities in Production ................................ ................................ ....................... 18 2.1.3. Government Intervention to Deal with Negative Externalities ................................ ..... 20 2.2. Presence of Positive Externalities and Government Intervention ................................ ........ 27 2.2.1. Positive Externalities in Consumption ................................ ................................ .................... 27 2.2.2. Positive Externalities in Production ................................ ................................ ......................... 29 2.2.3. Government Intervention to Deal with Positive Externalities ................................ ....... 32 2.3. Presence of Information Failure and Government Intervention ................................ ........... 39 2.3.1. Imperfect Information in Imperfect Competition ................................ ............................... 39 2.3.2. Information Failure – Underestimation of costs ................................ ................................ .. 41 2.3.3. Government Intervention to Deal with Imperfect Information ................................ ..... 46 2.4. Public Goods ................................ ................................ ................................ ................................ ............... 49 2.4.1. Non-Provision of Public Goods ................................ ................................ ................................ ... 49 2.4.2. Government Intervention to Deal with Non-Provision of Public Goods .................... 51 3. INEQUALITIES IN THE DISTRIBUTION OF INCOME AND WEALTH ................................ ............... 52 3.1. Causes of Income Inequality ................................ ................................ ................................ ................. 53 3.2. Government Intervention to Deal with Inequalities in Distribution of Income and Wealth ................................ ................................ ................................ ................................ ................................ ........ 55 4. GOVERNMENT FAILURE ................................ ................................ ................................ ........... 60 4.1. Reasons for Government Failure ................................ ................................ ................................ ........ 60 5. APPENDIX ................................ ................................ ................................ ................................ 63 5.1. Introduction to Behavioural Economics ................................ ................................ .......................... 63 5.2. Healthcare in Singapore ................................ ................................ ................................ ......................... 64 5.3. Should Healthcare Provision be left to the Market? ................................ ................................ .... 67 5.4. Dealing with Traffic Congestion in Singapore ................................ ................................ ............... 70 5.5. A Case of Negative Externalities- Environmental Degradation ................................ .............. 72 5.6. Climate Change Conferences ................................ ................................ ................................ ................ 74 5.7. Gini Coefficient in Singapore over the years ................................ ................................ .................. 78

Market Failure and Government Intervention Part 1 © St. Andrew’s Junior College Economics Department 3 Reading List and Reference 1. *John Sloman (2014), Economics 9th edition, Ch 10-12, Pages 284 - 378 2. *Mankiw, Quah and Wilson (2008), Principles of Economics: An Asian edition, Pages 207 – 248 3. Peter Maunder, Economics Explained Revised 3rd edition, Pages 124 - 125 4. Roger A. Arnold, Economics 4th edition, Pages 679 – 682, 691 – 692 5. Stanlake and Grant, Introductory Economics 6th edition, Pages 221 – 222 * Highly recommended readings Learning Objectives By the end of this series of lectures and tutorials, you should be able to: Efficiency and equity in relation to markets: ▪ Understand that market efficiency is achieved when allocative efficiency is attained. ▪ Understand that efficient resource allocation may not result in equitable outcomes. ▪ Explain inequalities in the distribution of income and wealth and the link to inequity. Market Failure and its causes ▪ Explain the meaning of market failure and the possible causes. ▪ Understand that markets may fail in terms of non-provision of public goods and services by the market, or non-socially optimal level of production and/or consumption due to the presence of externalities, information failure, immobility of factors of production, and market dominance. ▪ Explain with diagrams, how the presence of externalities leads to a divergence between private costs/benefits and social costs/benefits and causes the private optimum to differ from the social optimum. ▪ Explain with diagrams how information failur