Essay: “ When a govt intervenes to try to correct a problem of market failure, the problem of govt failure may result” (AQA)
a) Using examples of market failure, explain this statement. (20)
Market Failure occurs when there is an inefficient allocation of resources in a free market, this can occur for various reasons.
Externalities, if a good has negative externality social cost > private cost and people ignore the true social cost. Therefore in a free market there is over consumption of these goods e.g. smoking, cars, which cause pollution and congestion.
To overcome this market failure, the govt can try and reduce demand by taxing the good. However, this may cause govt failure.
Government failure occurs when govt intervention results in a more inefficient allocation of resources. For example, taxes will cause admin costs; the govt may have poor info about how much to tax and demand may be very inelastic.
To overcome under consumption of positive externalities, the govt could subsidise these goods e.g. trains, buses and education.
However, govt failure could result again. Subsidising companies may encourage them to be more inefficient, because they can rely on state funding. Also, subsidising firms is costly and the govt may have poor information about who and how much to subsidise.
To overcome market failure in agriculture, the CAP has given farmers minimum prices. But this has encouraged over supply. Therefore, it has been very costly to implement.
Monopoly leads to market failure because firms are in a position to increase prices at the expense of the consumer and be more inefficient. To prevent an increase in Monopoly power, the Competition Commission can block mergers; however, some mergers could have benefits e.g. economies of scale and more research and development. If the govt blocked all mergers this may be harmful to the economy
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