Transcript Government Intervention For Externalities

 Explain
the market failure
 Explain
the government intervention to
correct the market failure in terms of
efficiency or equity
 Use
economic models to illustrate each
market failure and the government
interventions to correct it .

Governments may intervene in the market if
Market Failure occurs

Market failure occurs when the market does

Efficient outcomes are where SMB = SMC

not result in efficient or equitable outcomes
For all types of externalities this does not
occur


Equity occurs if a situation or outcome
is considered to be fair.
Fairness is a matter of opinion often
based on peoples values
e.g. some person/group will think its
fair to tax high income earners more
than low income earners while other
people/groups may consider this
unfair.


To internalise an externality is to ensure that
private costs (or benefits) equal social costs
or benefits
This may involve govt intervention
Method
Subsidy
Sales Tax
Income Tax
Regulations
Transfer
Payments
Public
Ownership/
Provision
Effect/ what it is Best for:
Lowering the price to encourage the production
and use of certain products. More resources are
Lowers the cost of production
allocated to a good/service than would be provided
by the free market.
Raises the price to discourage the production and
Increases the cost of
use of certain products. Pay for some of the costs
production
imposed on society as a result of the product being
consumed
Reduces Incomes
More direct effect than
taxes or subsidies
Redistribution of incomes
from “rich to poor”
Situations where its not
socially desirable for provision
to be in private ownership.
Providing G&S not
sufficiently provided by the
free market
Reduces demand. Progressive taxation narrows the
gap between rich and poor and reduces inequality
of income
Limit or prohibit the production or consumption of
certain products. Enforce the production or
consumption of certain products
Addressing income inequality in form of social
welfare benefits and income support.
Army, Police
Libraries, parks, Rubbish collection,
Education
Equity
- Refers to people having fair amounts or shares of something or fair
access to something, including opportunities and resources.
- May mean that people are treated differently and get unequal shares to
be fair.