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Economics ­ Government Intervention in the market

Government Intervention in the Market
Market Failure = When resources are inefficiently allocated, because of imperfections in
the price mechanism which leads to a loss of economic & social welfare

Cases of market failure:

Negative Externalities
Positive Externalities
Public Goods
Merit Goods

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Environmental Market Failure

The environment plays an important role in shaping our economic & social welfare:

Provides services to consumers ­ living & recreational spaces
Provides natural resources necessary to sustain production & consumption
Provides a dumping ground for the waste products of our society

One of the most important…

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Distributional Effects:

In the case of global warming, the poor citizens in developing counties are more likely to be
affected by flooding/drought.

They are less likely to have contributed to global warming though consuming goods and
services that contribute pollution.

They are less likely to be able to afford to…

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Income Distribution ­ Imposing taxes on some demerit goods such as cigarettes may
have a regressive effect ­ they take a larger share of the incomes of low income
consumers = increases inequalities in the distribution of income
May not achieve target quantity of pollution reduction ­ Hard to predict…

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Extending Property Rights:

Externalities often occur because property rights are not fully allocated; a key problem with
the environment is that commonly used resources such as the air around us are not
privately owned and so no organisation takes responsibility if they are over-exploited
(tragedy of the commons)

Governments can…

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Cost Benefit Analysis:

CBA is used as a means of decision-making; when major projects have important or
controversial side effects it is used.

CBA takes into account all costs & benefits of an economic decision and is usually used to
evaluate major investment projects

It attempts to quantify the net…




This is a useful 6 page resume of how the government intervenes in the market to correct market failure. Seems quite comprehensive and notes can be used for a variety of prurposes.



Does anyone know a reputable businesses one can purchase a wide selection of Cheesecakes from

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