Topic 2 of 6 · Form 5
Government microeconomic intervention and market failure
Externalities (positive and negative; marginal social cost and benefit diagrams; deadweight loss), public goods and the free-rider problem, merit and demerit goods, information failure, monopoly power.
Notes for this topic 1 file, in order
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Market failure
Externalities (positive and negative; marginal social cost and benefit diagrams; deadweight loss), public goods and the free-rider problem, merit and demerit goods, information failure, monopoly power.
Intervention
Indirect taxes (ad valorem and specific) and incidence; subsidies; maximum and minimum prices; buffer stocks; direct provision; regulation; pollution permits; property rights; nudge theory.
Worked example: A specific tax of US$2 per unit raises the market price from US$10 to US$11.50. Who bears the tax?
Consumers bear US$1.50 per unit (75%) and producers US$0.50 (25%) – demand is relatively inelastic.
Government failure
Unintended consequences, information gaps, administrative costs, regulatory capture.
Equity and redistribution
Lorenz curve and Gini coefficient; policies to reduce inequality.
Check yourself
- What is the incidence of a tax?
- Why might a maximum price cause a shortage?
- What does a Gini coefficient of 0 represent?
Show answers
- How the burden of a tax is shared between consumers and producers.
- If set below equilibrium, quantity demanded exceeds quantity supplied.
- Perfect equality of income.
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