This is helpful for AS level

1. REASONS FOR GOVERNMENT
INTERVENTION IN THE MARKET
CHAPTER 12

2. WHY GOVERNMENT FIND
IT NECESSARY TO
INTERVENE IN THE
MARKET?

3. Rates of education exclusion in Sub
Saharan Africa
• Over one-fifth of children
between the ages of about 6 and
11 are out of school
• one-third of youth between the
ages of about 12 and 14.
• Almost 60% of youth between
the ages of about 15 and 17 are
not in school

4. An public school at a Sub Saharan African country

6. RECAPPING KEY TERMS

7. PUBLIC GOODS
• a good or service that is made available to all
members of society.
• one person’s use of the good does not
diminish its availability for others.
• Non-excludable, non-rivalrous
• Examples: National defense, street lights,
law enforcement, and public parks.

8. FREE RIDER PROBLEM
• Someone who does not pay to use public
good.
• free resource without paying for it.
• It describes what happens when many
people enjoy a seemingly free resource
without paying for it.

9. MERIT GOODS
• a product or service that have significant
social benefits.
• under-produced and under-consumed
through the market mechanism
• Provides free or cheaply: government
promote their consumption.
• Greater positive externalities

10. DEMERIT GOODS
• Goods or services that are considered to
have negative externalities and can lead to
harmful effects on individuals and society.
• Negative Externalities: imposes costs on third
parties who are not directly involved in the
transaction. These external costs can be
harmful to society at large.
• Overconsumption: the negative
consequences of their consumption, leading
to excessive usage.

11. Chapter 12
Reason for government
intervention in market

12. MARKET FAILURE
• A situation defined by an inefficient
distribution of goods and services in the free
market.
• The forces of supply and demand balance
each other out, with a change in one side of
the equation leading to a change in price that
maintains the market's equilibrium.
• In a market failure, however, something
interferes with this balance.

13. There has many situations of where market failure occurs, and
requires government intervention

14. GOVERNMENT INTERVENE IN MARKETS WHEN,
1. LACK OF PUBLIC GOODS
2. UNDERPRODUCTION OF MERIT GOODS
3. OVER CONSUMPTION OF DEMERIT GOODS
4. INFORMATION FAILURE

15. Addressing the non-provision of
public goods

16. Recall what a public good
is and its characteristics
Why publics goods
are provided by
government not
private sectors?
Explain using the
example of street
lighting

17. ADDRESSING NON-PROVISION OF PUBLIC
GOODS
Existence of free-rider problem
Impossible to charge directly for consuming a
public good
Private sector would not provide public good
(no opportunity to earn profit)
Thus, provided, funded and maintained by
government.

18. Addressing the overconsumption of
demerit goods

19. OVER CONSUMPTION OF DEMERIT
GOODS
• Undesirable for consumer
• Over produced and over provided
Therefore, OVERCONSUMED
• Reason: Lack of information,
imperfect information.
• Leads government to intervenes to
market to make an attempt to reduce
the consumption demerit goods

20. Methods used to reduce the consumption:
NEGATIVE ADV.
CAMPAIGN
(causes a shift in demand
curve for demerit goods)

22. IMPOSITION OF HIGHER TAXES
(movement along the demand curve as it
alters prices to higher level)

24. LAWS & REGULATION
Banning/ making consumption illegal,
implementing strict rules and regulation in
the process of production, handling and
serving of the demerit goods.

25. Addressing the under consumption of
merit goods

26. UNDER COSNUMPTION OF MERIT
GOODS
• Desirable for consumer & society
• Under produced & UNDER
CONSUMED
• Reason: Lack of information
• Government makes an attempt to
stimulate the consumption merit
goods

27. Provision and Consumption of
Health Care (Merit Good)
• Private Sector produces only : OX
• Access is restricted to those who can
pay P
• Govt. believes required OY level
• Produces and charges the average
price
• Under production of OY-OX= XY

28. Market fails
when resources
are not efficiently
allocated
i. Non-provision of public goods due to free rider problem
ii. Over provision and overconsumption of demerits goods due to lack
of information
iii. Under consumption and under provision of merit goods.
There many
situations of market
failure and need of
government
interventions
funded by the
government out of tax
revenue and provided
free of charge for the
public.
• ads and other programmes
• Imposition taxes on price
• Law & regulations
• Subsidy
• Public Provision
• Public Awareness Programmes

29. Controlling Prices in Market

30. SETS MAXIMUM PRICES
 Governments set price ceilings to limit the maximum price
of goods.
 Purpose: Protect low income groups and provide heavily
subsidized daily essentials.
 Examples: Former socialist economies allocated maximum
prices for basic food items like bread.
 Effectiveness: Maximum price must be set below the
equilibrium price.

31. SET MINIMUM PRICES
 Governments support agricultural sectors to safeguard
food supplies.
 Mechanism: Set a price floor for key agricultural products
like wheat and rice.
 Effect: Raises the price of the crop above the equilibrium
market price to protect farmers’ incomes.

32. PRICE CONTROLLING: CRITICISM
 Downside: Consumers may be worse off, as prices are
now above the equilibrium, leading to lower quantities
being traded.
 Inefficient Resource Allocation: Some argue that minimum
prices can lead to an inefficient use of resources.

33. And that's a wrap! Let's celebrate with a happy
dance!