资料讲义说明成果3government intervention in the price system.pptxVIP

3 Government Intervention in the Price SystemMain TopicsMarket FailureExternalitiesCost-Benefit ApproachMerit Goods, De-merit Goods Information FailuresPublic Goods Government InterventionMarket FailureDefinition:Where the market mechanism fails to allocate resources efficientlySocial EfficiencyAllocative EfficiencyTechnical EfficiencyProductive EfficiencyMarket FailureSocial Efficiency = where external costs and benefits are accounted forAllocative Efficiency = where society produces goods and services at minimum cost that are wanted by consumersTechnical Efficiency = production of goods and services using the minimum amount of resourcesProductive Efficiency = production of goods and services at lowest factor costMarket FailureAllocative efficiency:Also referred to as Pareto Efficient Allocation – resources cannot be readjusted to make one consumer better off without making another worse off – zero opportunity cost!After Vilfredo Pareto (1848–1923)Market FailureMarket Failure occurs where:Knowledge is not perfect - ignoranceGoods are differentiatedResource immobilityMarket powerServices/goods would or could not be provided in sufficient quantity by the marketExistence of external costs and benefitsInequality existsMarket FailureMarket FailureImperfect Knowledge:Consumers do not have adequate technical knowledgeAdvertising can mislead or mis-informProducers unaware of all opportunitiesProducers cannot accurately measure productivityDecisions often based on past experience rather than future knowledgeMarket FailureGoods/Services are differentiatedBrandingDesigner labels - they cost three times as much but are they three times the quality?Technology – lack of understanding of the impactLabelling and product informationWhich one is the ‘quality’ item and why?Market FailureResource ImmobilityFactors are not fully mobileLabour immobility – geographical and occupationalCapital immobility – what else can we use the Channel Tunnel for?Land – cannot be moved to where it mig