Government Intervention. Seeks to ensure: All can benefit, Efficient functioning of markets Desirable market outcomes Better allocation of resources, Fairer distribution of income Greater economic stability However :
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Seeks to ensure:
All can benefit,
Efficient functioning of markets
Desirable market outcomes
Better allocation of resources,
Fairer distribution of income
Greater economic stability
Too much government intervention – limits innovation, efficiency and growth
Too little – leave consumers exposed to instability, inequality and lack of basic community facilities
The best two examples are healthcare and education. Both of these goods can be provided privately and publicly
e.g.: discounts on medicine for pensioners ($5.80 max price in 2012),
housing for the needy,
free education for all,
free healthcare for all etc.
The concept of a merit good was introduced in economics by Richard Musgrave (1957, 1959) and is a commodity which an individual or society should have on the basis of some concept of need, rather than ability and willingness to pay
What restrictions has the government imposed on the production and sale of demerit goods?
In groups of two or three search 1 policy, advertisement or campaign which the government has come up with in an attempt to stop or limit the production and sale of demerit goods
The good has no close substitutes – no competition
e.g. Water board – no substitute for showering or washing cars – only other option is staying dirty!!
Legal or natural constraints that protect a firm from potential competitors
E.g. of legal constraints – law, patent or licence restricting competition by preventing entry
E.g. of natural constraints – firm can supply an entire market at a lower price than one or two firms can
Monopolisation – a firm which uses its powerful market position to eliminate existing competition or stop new firms from entering the market
Also occurs when an individual customer is
charged a higher price on a small purchase than
on a large one
Exclusive dealing – When a business sets conditions for supply excluding other retailers from dealing with competitors
in order to raise prices and profits
It is illegal in Australia
Cartel – group of firms entered into a collusive agreement
What is another cause of market failure which is not a result of the operation within individual markets?