Market failure and government intervention
Government intervention
While the price mechanism works efficiently for most goods and services, it can still create
unsatisfactory outcomes. This can result in market failure.
This is because the price mechanism is only about the needs of individuals, not the
community as a whole. When this occurs, the government may intervene.
Equilibrium occurs through a process known as the PRICE MECHANISM
The price mechanism is the process by which the forces of supply and demand interact to
determine the price of goods and services.
Market failure
Left to itself, the market will not provide some goods because there’s no profit in them,
such as streetlights and playgrounds.
There is a belief that everyone should have access to certain goods and services. However, if
left to the market, some people would be priced out of essentials like education, housing,
and cultural events and activities.
Left to itself, the market for certain goods can lead to negative side effects. Therefore, the
government intervenes to reduce these effects, as seen with coal-powered electricity and
cigarettes.
Left to itself, the market would provide poor outcomes for people: labour market,
prescription drugs
A Definition
‘Market failure’ refers to a situation where a market, in the absence of intervention, fails to
allocate resources efficiently. Examples of when market failure can arise include:
1. The nature of the market (natural monopolies)
2. The nature of the good (public goods and externalities)
Governments will thus intervene to provide a more desirable outcome for society.
, 2 types of Government intervention:
Price intervention
The government may intervene in the market when they feel that the market determined
price is too high or too low.
There are two types of price interventions:
Price ceiling
- A price ceiling is used when the government believes that the market-determined
price for a product is TOO HIGH
- They therefore create a maximum price – or a price ceiling.
- This price is always below the market determined price.
Home rental ceiling
- The government could put a ceiling on increases to rental housing to stop prices
rising
- However, this would lead to landlords leaving the market if they cannot obtain the
rent they would like
A Definition
A price ceiling sets a maximum price for a good or service. Prices are not allowed to go
above the ceiling price. Price floors are always set BELOW the equilibrium market price (as
the equilibrium market price is considered too high)
Government intervention
While the price mechanism works efficiently for most goods and services, it can still create
unsatisfactory outcomes. This can result in market failure.
This is because the price mechanism is only about the needs of individuals, not the
community as a whole. When this occurs, the government may intervene.
Equilibrium occurs through a process known as the PRICE MECHANISM
The price mechanism is the process by which the forces of supply and demand interact to
determine the price of goods and services.
Market failure
Left to itself, the market will not provide some goods because there’s no profit in them,
such as streetlights and playgrounds.
There is a belief that everyone should have access to certain goods and services. However, if
left to the market, some people would be priced out of essentials like education, housing,
and cultural events and activities.
Left to itself, the market for certain goods can lead to negative side effects. Therefore, the
government intervenes to reduce these effects, as seen with coal-powered electricity and
cigarettes.
Left to itself, the market would provide poor outcomes for people: labour market,
prescription drugs
A Definition
‘Market failure’ refers to a situation where a market, in the absence of intervention, fails to
allocate resources efficiently. Examples of when market failure can arise include:
1. The nature of the market (natural monopolies)
2. The nature of the good (public goods and externalities)
Governments will thus intervene to provide a more desirable outcome for society.
, 2 types of Government intervention:
Price intervention
The government may intervene in the market when they feel that the market determined
price is too high or too low.
There are two types of price interventions:
Price ceiling
- A price ceiling is used when the government believes that the market-determined
price for a product is TOO HIGH
- They therefore create a maximum price – or a price ceiling.
- This price is always below the market determined price.
Home rental ceiling
- The government could put a ceiling on increases to rental housing to stop prices
rising
- However, this would lead to landlords leaving the market if they cannot obtain the
rent they would like
A Definition
A price ceiling sets a maximum price for a good or service. Prices are not allowed to go
above the ceiling price. Price floors are always set BELOW the equilibrium market price (as
the equilibrium market price is considered too high)
