Other methods of government intervention

• How do merit and public goods causes market failure in a free market?


  Merit goods and public goods are under-provided in a free market, causing a market failure
• Why aren't public goods provided by private firms?

  • Public goods are beneficial for society and are not provided by private firms due to the free rider problem
  • They are usually provided free at the point of consumption, but are paid for through general taxation
  • Examples include roads, parks, lighthouses, national defence
• Why are consumers not able to always access merit goods?

  • Merit goods are beneficial to society but consumers cannot always access them as they are priced out of the market (e.g. private education or healthcare)
• How can the government correct market failure?

  • To solve the market failure, governments can provide these goods and services (state provision)
• What are the advantages of state provision?

  • Essential goods and services are usually provided free at the point of consumption 
  • These goods and services are accessible to everyone, regardless of income 
  • These usually provide both private and external benefits to society
• What are the disadvantages of state provision?

  • Paid for through general taxation 
  • There is an opportunity cost associated with their provision 
  • Products which are free may result in excess demand and long waiting times, e.g. procedures at Public hospitals or lenghty waits to see a GP
• What are common pool (access) resources?

  Common pool (access) resources are natural resources over which no private ownership has been established

  • Left to the free market, common pool resources can be over exploited and used in an unsustainable way
  • This results in the tragedy of the commons and environmental market failur
• What are property rights?

  • Property rights define the ownership of common pool resources and set out how they can be used
  • By transferring common land over to private ownership, the private owner has a strong incentive to manage the resource and take care of it for future use
  • This internalises the externality and can resolve tragedy of the commons related market failure 
• What are the advantages of property rights?

  • Ensures that resources are allocated efficiently
  • Reduces the harm caused by negative externalities
  • External costs of overusing common access resources are taken into account
• What are the disadvantages of property rights?

  • Difficulty in allocating and dividing up some resources
  • Air is a difficult resource to distribute
  • Difficult to allocate rights in a fair (equitable) way
  • Regulating and enforcing the property rights is expensive
• Describe how governments create pollution permits?

  • Governments calculate an optimum (or preferable) level of pollution
  • Governments create a pollution permit market and issue permits to polluting firms
  •  The price of the permit is determined by demand and supply
  • Each permit allows a firm to pollute up to a certain amount. Any surplus can be sold and traded for additional revenue
  • Firms that pollute more have to buy additional permits from less-polluting firms
  • known as the cap and trade system
• How does the cost of the permit move output closer to the socially optimal level?

  • The cost of the permit represents an additional cost of production, which should reduce supply and output closer to the socially optimal level
  • If the system works effectively, it can correct market failure by reducing the associated negative externalities
  • If the price of additional permits is more than the cost of investing in new pollution technology, firms will be incentivised to switch to cleaner technology