PJC_H2_ECONS_P2_Q3_Suggested_Ans

PJC 2018 H2 P2 Question 3: There are various types of market failure. Market failure provides one of the major justification for government intervention in the economy. Source: John Sloman, Economics, 6th Edition a. Explain how market dominance and immobility of factors of production in a country can lead to market failure. [10] b. Evaluate the policies currently used by the Singapore government to correct these types of market failure. [15] a) Explain how market dominance and immobility of factors of production in a country can led to market failure. [10] Market failure occurs when the free market fails to achieve allocative efficiency. It fails when resources are not perfectly mobile, or when firms have market power. Immobility of factors of production may lead to allocative inefficiency and hence market failure. Factors of production such as labour may be geographically or occupationally immobile. Geographical immobility may occur because of the high cost of relocation. This prevents labour from moving from areas with high unemployment to areas facing a shortage of labour. As such, workers remained unemployed. The economy is producing within the PPC, i.e. there is unemployment. This leads to wastage of resources (productive inefficiency), and less resources are thus channelled into the production of goods and services that will lead to greater societal welfare. Productive inefficiency implies allocative inefficiency, with the former a prerequisite for the latter. Occupational immobility occurs because of a mismatch between workers’ skills and job requirements. Workers current specific job skill may not be able to respond easily to changing demand conditions. For example, retrenched workers fr om the electronics manufacturing industry in Singapore do not have the necessary skills required for them to find jobs in the growing infocomm sector (structural unemployment). Labour may thus be put to inefficient use, instead of being allocated into markets where the labour is needed most. There is thus inefficient allocation of resources, with too little resources being channelled into the infocomm sector in this example. Thus immobility of factors of production causes market to fail.

Market dominance may lead to allocative inefficiency and hence market failure. Market dominance due to high barriers to entry allows existing firm to have a large market share and hence possess significant market power to set price. The firm faces a downward- sloping demand curve. Fig. 1: Revenue and cost curves of a firm with market power Profit-maximising