2024 SAJC JC1 H1 Microeconomic Objectives & Policies Lecture Notes (v2)

ST ANDREW’S JUNIOR COLLEGE JC1 H1 ECONOMICS 2024 Microeconomic Objectives and Policies 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 justific ation for government intervention in the free market. Learning about market failure will deepen our understanding of real-world complexities, equip us with the tools to analyze and predict the impact that decisions have on firms, industries 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. Important concepts and tools of analysis  Allocative Efficiency  Equity  Market Failure  Deadweight loss  Marginal private benefit and cost  Marginal external benefit and cost  Marginal social benefit and cost  Social versus private (market) optimum  Public goods – Non-excludability and non-rivalry  Information Failure Key questions to consider 1. What are the microeconomic objectives of the government? 2. What is market failure? 3. What are the sources of market failure? 4. How does the presence of externalities lead to market failure? 5. How does the presence of information failure lead to market failure? 6. How does the non-provision of public goods lead to market failure? 7. What can the government do to deal with market failure? 8. How does the lack of equity lead to a distributional issue? 9. What are the causes of inequity? 10. What can the government do to deal with inequity? 11. What causes government failure?

2 Contents 1. INTRODUCTION ..............................................................................................................................................................4 2. GOVERNMENTS’ MICROECONOMIC OBJECTIVES ................................................................................................5 2.1. Efficiency ..................................................................................................................................... 5 2.2. Equity .......................................................................................................................................... 8 3. MARKET FAILURE .......................................................................................................................................................... 10 3.1. Presence of Externalities and Government Intervention....................................................