MJC_H2_ECONS_EQ2

Discuss the extent to which government failure is the main factor that a government should consider when addressing the various sources of market failure. [25] Introduction Market failure occurs when the free market fails to allocate resources efficiently and equitably. There are various sources of market failure that is externalities, market dominance, income inequality, factor immobility and missing markets. Based on the various sources of market failure, government intervention is deemed necessary to overcome the problem of inefficiency and inequity so that the microeconomic objectives of the government are attained. However, in some circumstances, government intervention aimed at solving the problem create greater inefficiencies which outweigh the benefits of government intervention. This is government failure, an unintended consequence of government intervention. The likelihood of government failure is influenced by the availability of information and the constraints, that is, whether government has the ability to finance the policy. There are also other factors that could influence government decision to address market failure. The extent of market failure and the nature of the economy will determine the severity of the problem and whether government intervention is necessary. Development Students need to consider the likelihood of government failure as well as other factors that go into a government decision when it addresses specific sources of market failure. 1. Explain 2 sources of market failure 2. What contributes to govt failure  The need for intervention and type of intervention in the market (i) information failure [intended and unintended consequences as a result of intervention] (ii) efficiency due to the lack of profit motive 3. Other factors (i) severity of the market failure (ii) Nature of the economy Source of market failure Factors Elaboration Externalities [E.g. Negative Externalities in Production due to industrial production] Government Failure Likelihood govt failure  The need for intervention and type of intervention in the market (i) information failure [intended and unintended consequences as a result of intervention] Need for government intervention: Negative Externalities in Production - industrial production that result to carbon emission pollution reduces air quality which increased risk of respiratory problems  divergence of costs curve [MSC> MPC]  overallocation of resources  taxation required  socially optimal level achieved (i) Unintended consequences of govt intervention due to the lack of information available

The lack of information  i) overestimation of externalities, i.e. MEC  Result to overtaxation that do not bring about positive outcomes in reducing pollution. ii) PED values unknown  inability for producers to measure the exact amount of taxes This could bring about inequity in resource allocation. Severity of market