IJC_H1_ECON_Q3

Innova Junior College Prelim 2 2011 H1 Economics Essay Question 3 a) Using appropriate examples, explain why t he existence of positive externalities and public good causes market failure. [10] b) Discuss the view the Singapore government currently adopts the most appropriate policies in correcting the above sources of market failure. [15] a) Using appropriate examples, explain why t he existence of positive externalities and public good causes market failure. [10] How Public Goods cause markets to fail:  Private sector will not be willing to provide such public goods as the free rider problem make it difficult to charge people.  Important to highlight the non-excludable and non-rival nature of public goods with the use of appropriate examples  It is impossible for the producer to know where, when, how much and who to charge and hence no profits can be made.  But public goods are vital or essential to the nation Eg: National Defence, Policing for keeping law and order ….etc  Provision of public goods results in positive externalities (MSB>MPB),  No resources will be allocated to the production of public goods in the private sector.  Market fails as there is no provision of public goods at all. How existence of positive externalities cause markets to fail:  Private sector capable of producing goods with positive externalities.  However, market fails as goods are under-produced/consumed by the private sector and too few resources will be allocated to its production.  E.g. Education, healthcare etc.  Existence of positive externalities  MSB>MPB. Diagrams are necessary  Consumers tend to under-consume because they do not take into account the external benefits that accompany their consumption.  Deadweight loss results . L3 Uses relevant examples to clearly explain how public goods and existence of positive externalities lead to market failure. 7 - 10 L2 Under-developed answer with insufficient depth in economic analysis 5 – 6 L1 Some attempt to explain how public goods and existence of positive externalities lead to market failure 1- 4

b) Discuss the view the Singapore government currently adopts the most appropriate policies in correcting the above sources of market failure. [15] Public goods  Government adopts appropriate policies in correcting non-provision of public goods  E.g. National defence [Students should strategize and use education as example in part (a)]  Evaluate appropriateness of policies o Economic analysis of how the non-provision is being addressed o Evaluation: Can analyse amount of deadweight loss before and after government intervention  Defence takes up the largest proportion of government budget in Singapore. Could be a case of government failure  over-consumption However, situation has been improved from a case of non-provision In view of the increasing threat of terrorism (Changing situations)  requires govt to constantly review their polic