FINA 431 FINANCIAL MANAGEMENT IN THE PUBLIC SECTOR Latest Verified Review 2023 Practice Questions and Answers for Exam Preparation, 100% Correct with Explanations, Highly Recommended, Download to Score A+

FINA 431 FINANCIAL MANAGEMENT IN THE PUBLIC SECTOR Latest Verified Review 2023 Practice Questions and Answers for Exam Preparation, 100% Correct with Explanations, Highly Recommended, Download to Score A+ QUESTION ONE Market failure occurs when there is an inefficient allocation of goods and services in a market. That is, there exists another outcome where market participants' overall gains from the new outcome outweigh their losses (even if some participants lose under the new arrangement). Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point-of-view. Explain any four types of potential market failure including how they arise. (12 marks) TYPES OF MARKET FAILURE There is a clear economic case for government intervention in markets where some form of market failure is taking place. Government can justify this by saying that intervention is in the public interest. Basically market failure occurs when markets do not bring about economic efficiency. Government intervention occurs when markets are not working optimally i.e. there is a Pareto sub-optimal allocation of resources in a market/industry. In simple terms, the market may not always allocate scarce resources efficiently in a way that achieves the highest total social welfare. There are plenty of reasons why the normal operation of market forces may not lead to economic efficiency. 1. Public Goods Public Goods not provided by the free market because of their two main characteristics  Non-excludability where it is not possible to provide a good or service to one person without it thereby being available for others to enjoy  Non-rivalry where the consumption of a good or service by one person will not prevent others from enjoying it Examples: Street lighting / Lighthouse Protection, Police services, Air defense systems, Roads / motorways, Terrestrial television, Flood defense systems, Public parks and beaches. Because of their nature the private sector is unlikely to be willing and able to provide public goods. The government therefore provides them for collective consumption and finances them through general taxation.