NJC 2025 SH1 H1 H2 Econ Ch3 Seminar Notes (Final)

CHAPTER 3 Microeconomic Objectives and Policies OVERVIEW OF CHAPTER .......................................................................................................................................................... 1 1.INTRODUCTION ....................................................................................................................................................................... 2 1.1 FEATURES OF THE MARKET SYSTEM ...................................................................................................................... 3 1.2 ROLES OF THE GOVERNMENT .................................................................................................................................... 5 2. MARKET FAILURE .................................................................................................................................................................. 7 3. PUBLIC GOODS ........................................................................................................................................................................ 8 3.1 CHARACTERISTICS OF PUBLIC GOODS .................................................................................................................... 9 3.2 REASONS FOR MARKET FAILURE IN THE PROVISION OF PUBLIC GOODS ................................................ 10 3.2.1 CHARACTERISTIC OF NON-EXCLUDABILITY .................................................................................................. 10 3.2.2 CHARACTERISTIC OF NON-RIVARLY ................................................................................................................. 10 3.3 MICROECONOMIC POLICIES: PUBLIC GOODS AND COST BENEFIT ANALYSIS ......................................... 13 4. PRESENCE OF EXTERNALITIES ........................................................................................................................................ 14 4.1 NEGATIVE EXTERNALITIES ....................................................................................................................................... 19 4.2 MICROECONOMIC POLICIES: NEGATIVE EXTERNALITIES .............................................................................. 21 4.3 POSITIVE EXTERNALITIES ......................................................................................................................................... 30 4.4 MICROECONOMIC POLICIES: POSITIVE EXTERNALITIES ................................................................................ 32 5. INFORMATION FAILURE .................................................................................................................................................. 37 5.1 INFORMATION FAILURE ON THE COSTS AND BENEFITS ............................................................................... 38 5.1.1 IMPERFECT INFORMATION ABOUT THE COSTS ............................................................................................ 39 5.1.2 IMPERFECT INFORMATION ABOUT THE BENEFITS ………………………………………………………………… 41 5.1.3 MICROECONOMIC POLICIES FOR IMPERFECT INFORMATION ON BENEFITS AND COSTS OF CONSUMING A GOOD ........................................................................................................................................................... 42 5.2 IMPERFECT INFORMATION – ASYMMETRIC INFORMATION (FOR H2 ONLY) ........................................... 45 5.2.1 ADVERSE SECLETION ............................................................................................................................................... 45 5.2.2 MORAL HAZARD ........................................................................................................................................................ 49 6. MARKET DOMINANCE (FOR H2 ONLY) ........................................................................................................................... 51 7. FACTOR IMMOBILITY (FOR H2 ONLY) ............................................................................................................................ 52 7.1 OCCUPATIONAL IMMOBILITY .................................................................................................................................. 52 7.2 GEOGRAPHICAL IMMOBILITY .................................................................................................................................. 53 8. COGNITIVE BIASES AND GOVERNMENT INTERVENTION ....................................................................................... 55 9. GOVERNMENT FAILURE ..................................................................................................................................................... 59 10. DECISION MAKING EXAMPLE ........................................................................................................................................ 62

2025 SH1 H1 / H2 Economics Chapter 3 National Junior College: Economics Department H1 / H2 Economics - 8843 / 9570 1 OVERVIEW OF CHAPTER As all economic agents face the central economic problem of scarcity, they have to make decisions which aim to maximise their welfare (i.e. consumers seek to maximise utility while producers seek to maximise profit). From the previous chapters, we have see n how consumers and producers (the economic agents in the markets) are involved in the decision-making process. In the free market, scarce resources are allocated via the price mechanism. However, when left on their own , markets can produce undesirable out comes in terms of efficiency and equity. Government intervention is thus required to achieve the government’s microeconomic objectives of efficiency and equity. KEY DECISIONS RELATED TO THIS CHAPTER ✴ Consumers decide what and how much of the goods and services to consume to maximise their satisfaction given their limited purchasing power and information. ✴ Producers decide what and how much goods and services to produce to maximise their profit given their limited resources and information. ✴ Governments decide whether to intervene in the market, which sector, and how to intervene in order to achieve efficiency and equity given limited public funds and balancing differing objectives. KEY ECONOMIC AGENTS ✴ Consumers ✴ Producers ✴ Governments

2025 SH1 H1 / H2 Economics Chapter 3 National Junior College: Economics Department H1 / H2 Economics - 8843 / 9570 2 1. INTRODUCTION Throughout your journey in the study of Economics thus far, you have learnt how free market forces of demand and supply (the price mechanism) work to allocate scarce resources between competing uses. However, governments can often be seen attempting to in fluence the production and consumption of various markets at the micro economic level in the real world. Why does the government not leave the price mechanism alone to allocate scarce resources? Has the free market failed in the efficient allocation of scarce resources? In what circumstances do they fail to do so? Chapter 3 considers the above questions and discusses how governments intervene in markets to achieve the microeconomic objectives of efficiency and equity and how these interventions could create inefficiencies. Learning Objectives: ✴ Describe the key features of an ideal free market system ✴ Identify the roles of the government

2025 SH1 H1 / H2 Economics Chapter 3 National Junior College: Economics Department H1 / H2 Economics - 8843 / 9570 3 1.1 FEATURES OF THE MARKET SYSTEM Recall that resource allocation in a free market system is based on the price mechanism to signal and direct resources to the production of goods in accordance to consumer preferences. Under a perfect market, which is an ideal free market system with the absence of various sources of 1. Public goods 2.