Quick questions on Market failure and government intervention (VCE Economics Unit 3)

Market failure occurs when the competitive market mechanism fails to allocate resources efficiently. The market outcome diverges from the socially optimal outcome.

1. Public goods. Goods that are:

1. Indirect taxes. A tax on a good that internalises a negative externality.

Intervention is justified only when the cost of intervention is less than the cost of market failure. Costs include:

The 2024 ACCC supermarket inquiry. Found Coles and Woolworths used market power to extract excess margins from suppliers. Recommended mandatory unit pricing, supplier code reforms and merger reform.

ABC and SBS, Australian Defence Force, BOM weather services, ARC-funded basic research, lighthouses, public health surveillance.

Costs or benefits that fall on third parties not involved in the transaction.

Draw demand and supply with the social marginal cost curve above private marginal cost (the gap equals the external cost). Market equilibrium produces more than the socially optimal level. The deadweight loss is the triangle between the two cost curves over the over-production.

One party in a transaction has more or better information than the other.

When few firms dominate a market and can raise prices above the competitive level.

A tax on a good that internalises a negative externality.

A payment to encourage production or consumption of a good with positive externalities.

Direct rules constraining behaviour.

The government provides the good itself, often free or below cost.

The government owns commercial businesses.