MJC_H1_ECON_ESSAY_Q3

a) Explain the need for government interven tion in the cases of public goods and merit goods [10m] b) To deal with the problem of pollution from factories, some countries have chosen to use tradable permits while others have used legislation. Discuss the use of the above policies by the different countries to tackle the pollution problem.[15] Suggested answer to part a): Introduction Government intervention is needed as the above markets (for public goods and merit goods) fail. Market failure occurs whenever the price mechanism fails to allocate resources efficiently and equitably. Therefore, the government needs to take actions and provide a non-market mechanism to allocate scarce resources to bring about improved outcomes. /g3 Efficiency Equity Efficiency in resource allocation can only be achieved if there is allocative and productive efficiency at the society level. Equity has to do with “fairness”. Fairness in the allocation of resources occurs when income & wealth are evenly distributed Assuming a perfect market, the price mechanism alone will be able to allocate resources efficiently such that the right amount of the right good is produced using the least cost, thereby maximizing society’s welfare Public Goods /g3 Merit Goods/g3 Public goods are goods that exhibit characteristics of non-excludability and non-rivalry in consumption. The feature of non-excludability of public good means those non-paying consumers can benefit without having to pay for it. The feature of non-rivalry means that the consumption of the good by one user will not diminish the benefits available to other users.     Public goods tend to be provided by the govt as no firms will undertake the production. Free market without government intervention, will not allocate resources for the provision of public goods which are essential for the economic welfare of society as no private firms will be willing to supply these goods at zero price. Thus, the government has to intervene to undertake the provision.   Merit goods are goods that the government believes consumers will buy too few units if provided by the market because of information failure (under-estimation of the private benefits in consumption) and positive externalities in consumption (benefits on third parties not considered). Examples of merit goods include education and healthcare. This lack of information leads people to underestimate the private benefits of education and leads to under- demand and under-consumption of education. Without intervention by the government, external costs/benefits will not be factored into the consumers’/firms’ decision and overproduction/underproduction results. Government intervention through taxes/subsidies is likely to improve the resource allocation and thus improve society’s welfare. Conclusion: