9708_m23_qp_42
Market failure refer to the allocative inefficiency of resources within a free market. This could be
shown through the diagram where P = MC
The normal allocative efficiency situation would also be shown by a graph when its MSC = MSB
(the socially optimum level), however, when market failure occur, it deliberately shift either of
the curve out of the socially optimum level. Causes of a market failure could be by a negative
externalities. Negative externalities refers to the side effect, the spill over effect, that made an
impact on the third parties during a production/consumption process. In this case, with the usage
of air travel, there would be an increase in gas emission from the plane and as there is a
culmulative increase in the number of flights, it would result in a negative externalities of toxic
gas emission to the nearby town, may potentially cause outbreak of lungs disease. This is when
the graph shift to the left from S0 to S1
In the initial expectations, if a air travel firm take into account all of the social costs, S1, they
would result in the price of Popt and a production of Qopt. However, since firms (especially in
the free market) seek for profit maximization and they only pay for their private costs, the
external costs would be taken out, S0, firm then will have price set at Pmkt with a higher
production of Qmkt. Thus, Qmkt - Qopt, the negative externality has led to too much production.
Too many scarce resources are being devoted to the production of this product. The market has
, failed with a DWL (welfare loss), causing over production with too much toxic waste/pollution
being emitted out.
With market failure, government microeconomic policy would help to address the situation
(giving 2 Advantages and 2 Disadvantages each):
- Taxation -> increase cost -> higher price to consumer -> reduce demand and achieve
allocative efficiency. However, may be difficult to measure the amount of tax require to
address the situation + might cause inflation + takes long time to be effective
- Restriction to number of flights = Direct regulation
- Negative advertising -> However might increase cost to government
Conclusion, some policy could use to address the situation, but is uncertain about the
effectiveness, positive or not, it also depend on the nature of good and what happen to the
economic structure of an economy in the long run
-------------------
Globalisation would promote free trade, free movement of capital and labour and the transfer
technology. Cultural and political ties would also be strengthened. Low income countries would
include low lebels of productivity, high dependency ration, low GDP per capital with a
significant dependence on producing and exporting primary goods
An improvement in lving standards is very closely linked with an improvement in economic
performance is measured by increases in GDP per capital and changes in productivity which
enable change in GDP to be achieved. Globalization through trade and technology transfer
should provide opportunities to create more real wealth
Advantages: might have free trade -> more export -> increase balance of trade and economic
growth, labor force export -> injections, learn new technology and production technique from
foreign country => provision of jobs
Disadvantages: excess imports -> low GDP, inflation, dependency on import good and foreign
country, might not work to increase standard of living -> might give adverse effect of lowering
the living standard, firm might go out of business from foreign competitve firms
Conclusion, there is potential to increase standard of living, but still depend on the existing level
of low income household and how severe the standard of living is, as this take time to be address
and might not effective if the current situation if too severe. Appropriate measure of standard of
living is used, don’t entirely rely on the material benefits gained by globalisation
Market failure refer to the allocative inefficiency of resources within a free market. This could be
shown through the diagram where P = MC
The normal allocative efficiency situation would also be shown by a graph when its MSC = MSB
(the socially optimum level), however, when market failure occur, it deliberately shift either of
the curve out of the socially optimum level. Causes of a market failure could be by a negative
externalities. Negative externalities refers to the side effect, the spill over effect, that made an
impact on the third parties during a production/consumption process. In this case, with the usage
of air travel, there would be an increase in gas emission from the plane and as there is a
culmulative increase in the number of flights, it would result in a negative externalities of toxic
gas emission to the nearby town, may potentially cause outbreak of lungs disease. This is when
the graph shift to the left from S0 to S1
In the initial expectations, if a air travel firm take into account all of the social costs, S1, they
would result in the price of Popt and a production of Qopt. However, since firms (especially in
the free market) seek for profit maximization and they only pay for their private costs, the
external costs would be taken out, S0, firm then will have price set at Pmkt with a higher
production of Qmkt. Thus, Qmkt - Qopt, the negative externality has led to too much production.
Too many scarce resources are being devoted to the production of this product. The market has
, failed with a DWL (welfare loss), causing over production with too much toxic waste/pollution
being emitted out.
With market failure, government microeconomic policy would help to address the situation
(giving 2 Advantages and 2 Disadvantages each):
- Taxation -> increase cost -> higher price to consumer -> reduce demand and achieve
allocative efficiency. However, may be difficult to measure the amount of tax require to
address the situation + might cause inflation + takes long time to be effective
- Restriction to number of flights = Direct regulation
- Negative advertising -> However might increase cost to government
Conclusion, some policy could use to address the situation, but is uncertain about the
effectiveness, positive or not, it also depend on the nature of good and what happen to the
economic structure of an economy in the long run
-------------------
Globalisation would promote free trade, free movement of capital and labour and the transfer
technology. Cultural and political ties would also be strengthened. Low income countries would
include low lebels of productivity, high dependency ration, low GDP per capital with a
significant dependence on producing and exporting primary goods
An improvement in lving standards is very closely linked with an improvement in economic
performance is measured by increases in GDP per capital and changes in productivity which
enable change in GDP to be achieved. Globalization through trade and technology transfer
should provide opportunities to create more real wealth
Advantages: might have free trade -> more export -> increase balance of trade and economic
growth, labor force export -> injections, learn new technology and production technique from
foreign country => provision of jobs
Disadvantages: excess imports -> low GDP, inflation, dependency on import good and foreign
country, might not work to increase standard of living -> might give adverse effect of lowering
the living standard, firm might go out of business from foreign competitve firms
Conclusion, there is potential to increase standard of living, but still depend on the existing level
of low income household and how severe the standard of living is, as this take time to be address
and might not effective if the current situation if too severe. Appropriate measure of standard of
living is used, don’t entirely rely on the material benefits gained by globalisation
