A detailed presentation on Market Failure and different types of Government Interventions - Issues on Private and Public Goods

1. MARKET FAILURE AND
GOVERNMENT
INTERVENTIONS
Allocative Efficiency and Market Failure

2. STARTER
 Define opportunity cost.
 “There are limited resources relative to wants” is
the basis of which economic concept?
 When are PPC’s drawn with straight lines?
 When a PPF is bowed outwards what is it
showing?

3. PRODUCTION EFFICIENCY
 All points on a PPC frontier show production
efficiency because at these points resources are
fully employed and put to their best possible use.
Consumer
Goods
Capital
Goods

4. ALLOCATIVE EFFICIENCY
 The point which represents the combination of
goods that consumers want. By changing the
combination of goods you can not make somebody
better off without making somebody else worse
off. Consumer
Goods
Capital
Goods

5. PRODUCTION INEFFICIENCY
 If the point is inside the PPC it is a production
inefficiency point. Not all resources are fully
utilised.
Consumer
Goods
Capital
Goods

6. CONDITIONS TO ACHIEVE
ALLOCATIVE EFFICIENCY
 Consumer Sovereignty (The consumer knows
best)
 Consumers are the best judge of what is good for
them.

7.  Perfect Information
 All consumers are well informed enabling them
to make sensible decisions.
CONDITIONS TO ACHIEVE
ALLOCATIVE EFFICIENCY

8.  Perfect Mobility of Factors
 Capital resources and human resources
 Factors of production must shift into the
activities that best represent the consumers
wants and needs.
CONDITIONS TO ACHIEVE
ALLOCATIVE EFFICIENCY

9.  Perfect Competition
 Firms must be price takers
 A homogeneous or identical product;
 Numerous buyers and sellers, none large enough to
influence the price.
 Freedom of entry or exit from the market.
CONDITIONS TO ACHIEVE
ALLOCATIVE EFFICIENCY

10. Fair income distribution
 Let the market forces set the wage rates for
different professions.
 High demand for doctors, low supply, so doctors
get a high wage.
 There is a demand for supermarket workers, but
the high supply of potential supermarket
workers pushes the wage rate of supermarket
workers down.

11. No externalities
 What about goods that incur costs or benefits to others?
Externalities.
 The market won’t take account of the cost and benefit to
others so if externalities are present the market is not
allocative efficient.
Externality Cost to others Benefit to others
Pollution in a
river
Courtney takes
the bus to school
Drinking alcohol
Fishermen
down stream
Less congestion on
the road for
everyone else.
Damage to
property

12. No Public Goods
 When price signals are not clear the market
breaks down.
 The private sector won’t produce goods with
unclear price signals.
 These goods are called public goods and the
market fails to produce these goods.

13. MARKET FAILURE
 Those six conditions are not met so market
failure occurs.
 New Zealand is currently at an inefficient point
inside the PPC where it is possible to make
somebody better off with out making others
worse off. Consumer
Goods
Capital
Goods

14. State Intervention
MARKET FAILURE AND
GOVERNMENT
INTERVENTIONS

15. THE GOVERNMENT
 If perfectly competitive markets are left on their
own they may fail to provide an efficient and fair
allocation of resources so the government steps
in.

16. ROLES OF THE GOVERNMENT
 Regulatory role
 Allocative role
 Distributive role
 Stabilisation role

17. REGULATORY ROLE
 The rules that are established to make the
market system work effectively.
 Employment Relations Act, Fair Trade Act and
the Consumer Guarantees Act.

18. ALLOCATIVE ROLE
 The government must determine how some
resources are allocated.
 Collective goods such as roads, education and
health.

19. DISTRIBUTIVE ROLE
 The free market outcome results in an unfair
distribution of income, so the will intervene to
assure everyone has a sufficient income.
 They do this through benefits, state housing and
educational courses.

20. STABILISATION ROLE
 The government intervenes in the market to
ensure there is steady growth.
 They do this through monetary and fiscal policy.
 We have just seen the OCR drop from above 8%
down to 2.5% and it is now steadily rising again.

21. GOVERNMENT INTERVENTION
 Taxes- a compulsory payment to the government.
 Subsidy- a payment by government to firms to
keep costs low.
 Transfer payments- a payment made by the
government with nothing in return.

22. PRIVATE AND PUBLIC
GOODS

23. PRIVATE GOODS
 A private good is a good or service which a
person will be excluded from owning or using if
they do not pay for it.
 Market forces achieve the best allocation of
resources, allowing consumer and producer
surpluses to be maximised.

24. CHARACTERISTICS OF PRIVATE
GOODS
 Rival (depletable)- if one person consumes a good
the benefits of it are not available for others.
 Excludable by price- Individuals can only
consume the good if they pay for it.
 The market is good at producing private goods.
Firms are willing to produce goods that they can
charge for as this will generate profit.

25. PUBLIC GOODS
 Price signals for public goods are non-existent
because the goods are non-excludable by price
and they are non-rival.
 Once a public good is provided then it is
impossible to stop someone else using the good or
service. Individuals who do not pay can not be
excluded from using the public good.
 Non-rival- If one person has the public good,
others can use it with no extra resources or cost
required.

26. MIXED GOODS
 Mixed goods are goods that can be provided by
the government or the private sector. They have
a private aspect that can be marketed or sold.

27. THE FREE RIDER PROBLEM
 When people refuse to contribute to the cost of
providing a public good on the grounds that once
it is provided no one can be excluded from using
it.
 In this situation private producers will have no
incentive to produce the goods as they have no
way of charging for the product so they can’t
make a profit.

28. SOLUTION
 The government raise money through taxation to
provide public goods.

29. Hospital High School Police Army
Roads Bridges Medical Drugs University
Dentist Visits Navy Air Force Cycle Helmets
Cigarettes McDonalds Net Ball Courts Gambling
Eye
Examinations
Seatbelts Cars with ASB
breaks
Snowboard
Milk Recycling Plant Slippers Electric
Blankets
Alcohol Guns Cycle Ways Sports
Stadiums
Rubbish
Collection
Swimming
Pools
Park Street Lamp

30. MERIT GOODS
 A merit good is a good that society or the
government deems that people ought to have
because it is considered to be good, consumption
is encouraged.
 The government may encourage consumption by
provide these goods free of direct charge, by
providing a subsidy or by compulsion.

31. DEMERIT GOODS
 A demerit good is a good that government or
society deems to be harmful or bad for people.
 The government may prohibit consumption or
impose taxes on goods.

32. Hospital High School Police Army
Roads Bridges Medical Drugs University
Dentist Visits Navy Air Force Cycle Helmets
Cigarettes McDonalds Net Ball Courts Gambling
Eye
Examinations
Seatbelts Cars with ASB
breaks
Snowboard
Milk Recycling Plant Slippers Electric
Blankets
Alcohol Guns Cycle Ways Sports
Stadiums
Rubbish
Collection
Swimming
Pools
Park Street Lamp

33. COLLECTIVE GOODS
 A collective good is a good provided by the
government that is free of direct charge paid for
by taxes.
 Collective goods have an opportunity cost. The
more collective goods we have the less private
goods we have.
 Collective goods should be provided up to the
point at which MSC=MSB

34. PRODUCTION POSSIBILITIES
CURVE
Private
goods
Collective
goods
A
B

35. CHARGING FOR PUBLIC GOODS
 Once a public good is provided it does not cost
any more for others to gain benefit through using
it.
 Thus excluding people from using the good would
be inefficient.
 E.g. Toll on bridge.

36. CHARGING FOR A PUBLIC GOOD
MB
Charge
Price
Welfare lost through charging
for public good.
Capacity of the public good
Quantity

37. TAXES AND SUBSIDIES ON GOODS.
 Governments can tax demerit goods and
subsidise merit goods.

38. TAX
S
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Quantity
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Price
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39. SUBSIDY
S
D
Price
($)
0
10
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10 20 30 40 50 Quantity
(000)
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