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 .....