Market Failure and Hovt Intervention

Module 2882 Market Failure and Government Intervention

This module provides an overview of how markets can be efficient and how they can fail. It further considers how governments intervene in markets to try to overcome market failures and how that intervention could itself create inefficiencies. The emphasis throughout the module should be on the use of economic principles to explain economic issues of current concern. For example, an issue might be pollution: why it represents a market failure; how governments might try to tackle the problems; and the problems involved in governments trying to tackle it on a national and global basis.

5.2.1 Economic efficiency within competitive markets

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The conditions for efficient allocation of resources including the concepts of allocative, productive and Pareto efficiency. Competition and the efficient allocation of resources.

Candidates should be able to:

A. describe what is meant by efficiency in economics;

B. explain what is meant by productive efficiency;

C. explain what is meant by allocative efficiency;

D. explain what is meant by Pareto efficiency;

E. illustrate how the concepts of efficiency can be applied to the productive possibility curve;

F. understand how competition can lead to an efficient allocation of resources.

This includes a review of what efficiency means and how free markets achieve it. The types of efficiency which are achieved relate to how cheaply something is produced (productive), whether firms produce all the units they could sell at a profit (allocative), Pareto (when both of these happen together). We can show allocative efficiency on the PPF: productive efficiency would be on a point on the curve, rather than inside the curve (where production is not efficient). Allocative efficiency would be achieved if the point on the curve reflects the proportions of the two goods A and B which people want to buy most.

5.2.2 Why markets may not work efficiently

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