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Market Failure Causes Functions Role of Govt

The document discusses market failure and the functions of government budget policy. It defines market failure as when the market economy fails to maximize efficiency due to imperfect structures, externalities, public goods, or unfair outcomes. It provides examples of how markets can fail to produce enough of some goods or produce too much of unwanted goods. The document then explains the three roles of government budget policy: 1) allocative role of providing public goods, 2) distributive role of redistributing resources through taxes and transfers, and 3) stabilization role of ensuring economic stability through fiscal and monetary policy.

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18 views7 pages

Market Failure Causes Functions Role of Govt

The document discusses market failure and the functions of government budget policy. It defines market failure as when the market economy fails to maximize efficiency due to imperfect structures, externalities, public goods, or unfair outcomes. It provides examples of how markets can fail to produce enough of some goods or produce too much of unwanted goods. The document then explains the three roles of government budget policy: 1) allocative role of providing public goods, 2) distributive role of redistributing resources through taxes and transfers, and 3) stabilization role of ensuring economic stability through fiscal and monetary policy.

Uploaded by

viewjhonson
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Market Failure &

Functions of
Budget Policy of
the Government
Market Failure
 Market failure: Problem that causes the
market economy to deliver an outcome
that does not maximize efficiency.
 Market Failure can occur from any of
the following
 The existence of imperfect market
structures
 Externalities
 Public Goods
 Merit and Demerit goods
 Situations where the market leads to
inequitable (unfair) outcomes
Market Failure
 Markets can fail in a number of ways
(Examples):
 Some products may be under produced or not
produced at all. ie parks

 Some products may be produced or over produced


but are not wanted by society
 ie drugs
 The production and consumption of some products
affect third parties.
 ie pollution and smoking cigarettes.
 The distribution of market income may not enable all
citizens to participate meaningfully in society
Market Failure
 Market failure provides governments with
the reason to intervene in the economy or
in particular markets that are failing.

 Government intervention aims to


overcome the failure of markets to move
towards a more allocatively efficient
position
Government Intervention
1. Allocative Role
The allocative role of government is its role in providing
resources to support public goods, such as
infrastructure and national defense. This provision of
social goods is what is known as the allocation
function. Market failure in the provision of social goods
arises because of the presence of public goods. These
are goods we consume collectively and therefore one
person who purchased the good can exclude no one
from the benefits arising from consumption of such
goods.
Government production of goods or regulation of business,
aimed at improving the allocative efficiency of the
economy. "(i.e. getting the "right mix" of products
produced, each in the "ideal quantity" and at the "ideal
quality")
Government Intervention
2. Distributive Role
The distributive role of government is its role in deciding to
whom resources are allocated--in practice, this generally
means deciding where to set the balance between free
market outcomes and redistribution through taxes and
transfers. Among various fiscal devices, redistribution is
implemented most directly by:
 A tax scheme which combines progressive income taxation of
high income households with a subsidy to low income
households.
 Alternatively, redistribution may be implemented by progressive
income taxes used to finance public services especially those
such as public housing scheme, hospitals and other health care
schemes, education schemes etc which particularly benefit low
income households.
 A combination of taxes on goods purchased largely by high
Government Intervention
3. Stabilisation Role

 Attempts by government to minimize fluctuations in overall


macroeconomic activity.
 The stabilization role of government is its role in ensuring
overall economic stability, particularly in terms of setting
fiscal and monetary policy to reduce the harm and duration
of recessions.
 Stabilization of the economy (e.g., full employment, control
of inflation, and an equitable balance of payments) is one of
the goals that governments attempt to achieve through
manipulation of fiscal and monetary policies. Fiscal policy
relates to taxes and expenditures, monetary policy to
financial markets and the supply of credit, money, and other
financial assets.

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