Alternative to Market Solutions - Role of Government

• Ceiling Prices

  A maximum price for a good is established below market equilibrium. This will cause disequilibrium - shortage of goods.
• Floor Prices

  Set prices above the market equilibrium price as a minimum price that must be paid. They result in excess supply.
• Externalities

  A side effect or consequence of an activity that is not reflected in the cost of that activity.
• Negative Externalities

  • Pollution
  • Environmental damage
• Positive Externalities

  • Parks
  • Museums
  • Galleries
• Merit Goods

  Not produced in sufficient quantity by private sector because insufficient value is placed on these goods or the market is too small. Private sector firms are unable to achieve profit maximisation so they do not produce these goods.
• Public Goods

  Goods private firms are unwilling to supply since usage cannot be restricted to those willing to pay for the good. They are non-exclusive and non-rival.
• Market Failure

  When markets do not produce desired outcomes.

  • Market price may be too high or low
  • Equilibrium quantity may be too high or low

  When this occurs, governments may intervene in the market.
• Positive Externalities


  When consuming or producing a good causes a benefit to a third party
• Negative Externalities


  When consuming or producing a good causes a cost to a third party.
• Tax

  Governments can implement laws to restrict production levels if private organisations do not consider negative externalities. Governments may also tax businesses to reduce production levels with increased production costs.
• Subsidies


  Subsidies may be granted to producers that have positive externalities. They keep production costs or prices of goods lower.