Market failure occurs when the price mechanism is unable to allocate resources efficiently and equitably. This is where the government needs to intervene and come up with solutions to enable the allocation of scarce resources.
Now then, how can market failure be overcome?
(With reference to this Video: http://www.youtube.com/watch?v=Unh9uJggjRg)
In the event of external cost of production, the government should intervene and carry out various plans, such as implementing taxes or providing subsidies. This is to correct externalities to obtain social efficiency, where Marginal Social Benefits=Marginal Social Costs (MSB=MSC).
Taxes are payments that producers and consumers are required to make to the government.
In the event of external benefit in production and/or external benefit in consumption, subsidies should be granted by the government to producers. This is in a bid to increase supply(in the case of external benefit in production) and to increase demand(in the case of external benefit in consumption).
-Felicia(Yan Xin)
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Very clear explanation in the video. However, do take note that you need to identify how much would the tax and subsidy need to be in order to achieve the socially optimal level of output (Qso). This is not explained in the video. ~Ms Chen
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