Economics

Economics Assessment

Question 1

Market failure occurs when markets are not economically effective. This is when there is insufficient allocation of scarce resources in a free market; this in turn affects our social welfare. The government will then intervene to help stabilise the economy and improve efficiency in the way markets operate.

The government have put in place “instruments of policy” to overcome market failure, there are various different types of market failure for e.g.,

1. Public Goods

2. Merit Goods

3. Externalities

4. Imperfect Competition

5. Monopoly

6. Inequality

Public Goods

Public goods are commodities which are not provided by the private sector because people would refuse to pay for them, even if they are beneficial to them. Examples of public goods are emergency services, roads, street lighting etc. The government provides public goods and finances them through public taxation.

There are 2 characteristics of public goods, non-rivalry and non-excludability.

1. Non-rivalry - is the consumption of a good or service which does not impact another person’s enjoyment of it. For e.g. a radio station, if I am listening to a radio station it doesn't mean that someone else can't.  A rival good could be an apple.  If I eat the apple, you cannot eat it after I’ve finished.

2. Non-excludability – occurs when it’s not possible to provide a good without it benefiting others, for e.g. building a new road.

Merit Goods

The government provides merit goods which are goods and services that people will under-consume if they were not available free of charge or subsidised by the government. Examples of merit goods are education, NHS health service, public libraries etc.

Externalities

Externalities occur when the production of a good leads to a harmful effect to others. For e.g. if produced chemicals are spilt into a waterway this will cause pollution which in turn will have a detrimental effect on fish, then...