Essay Plans

Outline possible reasons for the government to intervene in the price system.

A straightforward essay - current affairs and diagrams are essential.

SYNOPSIS:

POINTS:

  1. A government may intervene in a case of market failure, ie where there is no incentive for a firm to produce a good or a service even though utility would be gained from its consumption. Also a firm may fail to produce enough of a good or even too much of a good. Importantly, definitions of externality, merit, demerit, public and quasi-public goods must be learnt.

  2. An externality is a cost or a benefit external to an exchange. Whenever price via supply and demand does not fully reflect ALL costs (see CBA) and ALL benefits of production and consumption, the price system will not bring about an efficient allocation of resources. Hence government intervention. Giving examples of an externality, remember the four types: generated in production received in production; generated in production, received in consumption; generated in consumption and received in production; generated in consumption and received in consumption.

  3. Public goods need to be provided. These exhibit four main characteristics:-

    • Indivisibility
    • Can be used by increasing numbers of people at no extra cost
    • Additional users do not deprive others
    • Difficult to charge people for a public good on the basis of how much they use

  4. Distinctions: a merit good may be a private OR a public good as they may be provided through the market (education, health care). Government provision of merit goods allows a redistribution of real income as provision is financed out of the (progressive) taxation system. The state provision of health, education at a price below the market-clearing price provides a more effective labour force and improved standard of living etc. (Note: education and health service cuts?)

  5. A government may also intervene to improve competition - taxation, legislation, removal of barriers (1992 etc) or subsidies. Examples are needed.

  6. To remove inequalities of income and wealth. Through taxation (several, inheritance, direct tax).

  7. To improve factor mobility - examples of training schemes (supply-side economics) and capital incentives.

  8. To raise revenue to pursue macro-economic aims of reducing inflation, unemployment, to increase economic growth etc. (Current affairs essential).

  9. Political objectives - reduce the role of the state/increase of role.

  10. Specific examples could be discussed eg. Minimum wages or rent controls BUT care must be taken to provide a balanced essay giving all the reasons for intervention.
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