1. Demonstrate understanding of government interventions to correct market failures

2.  The free market is not always able to achieve allocative efficiency. – Market Failure An allocative efficient point is where All resources are allocated to their most efficient use All markets are in equilibrium The economy is operating on its production possibility curve. It is not possible to make someone better off without making someone else worse off (Society’s well being is maximised) This situation is also called Pareto efficiency We will be looking at situations where it is possible to make someone better off without making someone else worse off. This is when governments intervene in the market.

3.  Requires clear price signals There must be  Perfect Competition  Perfect Information  Perfect Mobility  Consumer Sovereignty  No Externalities or public goods Reading Price Signals

4. ◦ Market Failure can occur from any of the following  The existence of imperfect market structures  Externalities  Public Goods  Merit and Demerit goods  Situations where the market leads to inequitable (unfair) outcomes

5.  Markets can fail in a number of ways ◦ Some products may be under produced or not produced at all. ie parks ◦ Some products may be produced or over produced but are not wanted by society  ie drugs ◦ The production and consumption of some products affect third parties.  ie pollution and smoking cigarettes. ◦ The distribution of market income may not enable all citizens to participate meaningfully in society

6.  Market failure provides governments with the reason to intervene in the economy or in particular markets that are failing.  Government intervention aims to overcome the failure of markets to move towards a more allocatively efficient position

7.  Perfect Information – where all consumers and producers have the same knowledge about all products and all markets at all times. ◦ This is an impossible situation  Imperfect Information – Where consumers and producers do not have full information about all products, prices and markets.  Because imperfect situations exist producers and consumers cannot make the best decisions regarding consumption and production. Causing market failure

8.  Governments attempt to get information out to producers and consumers that would otherwise be unavailable or hard to obtain.  E.g. www.whatsmynumber.org attempts to provide consumers information about electricity prices.www.whatsmynumber.org

9. Types of Government Intervention Taxation Public Provision Regulation Education and social marketing campaigns Transfer Payments Subsidies Establish Property Rights

10.  Four functions of the government 1.Legislative/Regulator Role Legal Framework Providing a framework so buyers and sellers know their rights and obligations – enables fair dealing. Legal system used to clarify, define and enforce property rights. Promoting Competition Commerce Commission Correcting for externalities

11. 2. Allocative Role Governments allocate resources that the market fails to produce in sufficient quantities 3. Distributive Role Governments aim to promote equity (fairness) This may be done through redistribution of incomes 4. Stabilisation Role Government aims to provide a stable economic environment

13. 1. Cuts taxes to reduce unemployment 2. Specifies that a manufacturer is liable for any harm caused by its product 3. Places a tax on a steel producer’s pollution 4. Legislates that it is illegal to discriminate on the basis of gender, ethnicity or sexual orientation 5. Imposes a wage/price freeze 6. Provides funding for a job search scheme 7. Provides benefits for low income families 8. Provides childcare funding to allow women to work 9. Legislates to prevent misleading advertising 10. Prevents large companies from merging

14. Method Effect/ what it is Best for: Subsidy Sales Tax Income Tax Regulations Transfer Payments Public Ownership/ Provision Lowers the cost of production Lowering the price to encourage the production and use of certain products. More resources are allocated to a good/service than would be provided by the free market. Increases the cost of production Raises the price to discourage the production and use of certain products. Pay for some of the costs imposed on society as a result of the product being consumed Reduces IncomesReduces demand. Progressive taxation narrows the gap between rich and poor and reduces inequality of income More direct effect than taxes or subsidies Limit or prohibit the production or consumption of certain products. Enforce the production or consumption of certain products Redistribution of incomes from “rich to poor” Addressing income inequality in form of social welfare benefits and income support. Situations where its not socially desirable for provision to be in private ownership. Providing G&S not sufficiently provided by the free market Army, Police Libraries, parks, Rubbish collection, Education