How can the government correct market failure?

Mindmap explaining 7 methods of government intervention which aim to reduce market failure. Evaluative points included in pink.

  • Created by: Carissa
  • Created on: 02-05-15 10:14
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      • Legislation can be used to control the quality and quantity of goods and services produced and consumed 
        • Sale of certain drugs by making them only available on prescription 
        • The Food Standards Agency sets minimum standards for food production 
          • e.g. EU restrict chemicals in meat
        • Setting of a minimum age at which a person can buy certain products such as alcohol, cigarettes or lottery tickets. 
        • Control monopoly abuse through regulatory bodies such as the competition commission 
          • Interbrew could not takeover Bass brewer in January of 2001, because it would create too dominate a firm 
      • Evaluative Points
        • There is no incentive to become more efficient and reduce emissions to below the maximum level set. 
        • HMIP find they are up against businesses quite prepared to pollute and pay the fines as the private benefit to them exceeds the private cost (Fines). 
      • Through the extension of property rights water companies (and the Environmental Protection Agency) are able to seek compensation from companies and individuals which pollute rivers. 
        • This is a means by which the problem of the externality is internalised, and so eliminating the problem by bringing it back into the market mechanism. 
        • However if there is no way of enforcing ones property rights it may make sense to pay the polluter to stop.
        • The World Bank has given $110 m to 11 developing countries to encourage them to reduce their emissions. A further $760m is being used to reduce these countries dependency on certain harmful chemicals.
        • Difficult to place an agreeable monetary value on the loss to society which results from pollution. 
      • Government assesses the cost to society of pollution. It then sets a tax rate on polluters so that the tax is equal to the value of the externality.  
        • As a result of costs of production rising output declines and with it so does pollution. 
          • Government often finds it difficult to establish the appropriate tax level because it is difficult to set a monetary value on pollution.  
          • To work properly a tax rate must be set that is equal to the marginal pollution cost. 
      • Government sets the desired level of pollution. It then allocates permits to firms and polluters. These permits can then be traded between polluters in return for money. 
        • The advantage of this scheme is that if it is possible a firm will reduce emissions, and so be able to sell spare permits. 
        • Idea to create an international market to trade the right to emit greenhouse gases. Thus countries which need to emit more, can buy rights from those countries which have been working below their quota. 
          • The developing world continues to argue that it must pollute in order to allow it to grow. 
      • Government to influence production, prices of commodities, incomes or the distribution of wealth in an economy also uses financial tools such as taxes and subsidies. 
        • For example, in the case of public transport government gives a partial subsidy, and in the case of eye tests, and dental care a total subsidy for those still in full time education under the age of 19. 
      • In addition to providing the finance it is also possible for a government to take over the production of a good or service, either in whole or in part. 
        • These nationalised industries in many countries include electricity, coal mining, and other utility services. 
      • Income transfers are used by government as a means of redistributing income from certain groups in society to others. 
        • The justification for this being an attempt by government to achieve an equitable distribution of income in the economy. 
          • These transfers of income may be in the form of a cash benefit paid by government to those with low incomes, such as income support or job seekers allowance. 
            • Finally in-kind transfers occur when some people in society are given a service free whilst others must pay. For example, eye tests for those on low incomes. 


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