1. Correcting market failure
REVIEW 5.4
Correcting market failure

2. Market Failure – When the market (through demand and supply) fails to allocate resources in the best interests of society as a whole.
1. Free Market – No Government intervention
2. Mixed Market – Some Gov’t intervention
3. Planned/Command Market – Totally run by Government
Up to 1920’s little government intervention, the market knew best Wall Street Crash, Great Depression, market failed.
1930’s Heavy gov’t intervention
Government intervention
1980 > attempting to reduce gov’t intervention.

3. Causes of inflation Externalities
Externalities can either be a cost or a benefit. They can be generated in consumption e.g cigarettes(cost) education (benefit) or they can be generated in production e.g pollution (cost)

4. How the Gov’t corrects problem of externalities
1. Taxes on demerit good (raise the price)
Subsidies on merit goods (schools)
Laws and regulations
Provision of merit goods (hospitals)
A zero priced good – pay for it through tax (education)
A free good – no opportunity cost

5. REVIEW 6.1
Fiscal policy

6. FISCAL POLICY
A policy that uses taxation and government spending to try to achieve the objectives of the government.
Balanced Budget- Government spending is equal to tax revenue
Budget Deficit – Government spending is greater then tax revenue
Budget Surplus – Tax revenue is greater then government spending

7. Multiplier effect – a process by which an original change in incomes in the economy leads to a total change in incomes which is a multiple of the original change.
A positive note on fiscal policy is that its effects are immediate.