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Friday, May 8, 2009
Today we went through the question on
"The govt should only intervene in the case of public good provision because too much govt intervention is undesirable". Discuss (25m)
For these that did not come today or miss up some point, here are the points. Good luck in writing your essay.
INTRO:
Explain government intervention
Objective of government intervention: to correct inequity or inefficiency
Define economic efficiency: Economic efficiency is achieved when it is not possible to change the existing allocation of resources in a way that makes one person better off without making someone else worse off.
THESIS: government should only intervene in the case if public good provision because too much government intervention is undesirable.
Why government should intervene in the case of public good:
Public has the feature of non-excludability and non-rivalry.
Result in free rider problem- weaken incentive for consumers to offer to pay(no demand revealed) The market failed because no resources will be allocated to their production.
Importance of public good: (external benefit of missing market)
Undesirable(inefficient) of over intervention
Problem of government intervention:
Tax-Hard to measure external cost, disincentive to investment.
Legislation- Need a lot of manpower to monitor and enforce-> more money needed -> result in government collecting more tax.
Subsidy- Hard to measure exact value of external benefit, requires high tax to finance.
Direct provision- Hard to estimate the right amount to provide, overconsumption.
Explain government failure:
Information failure- Hard to obtain exact information such as extent of externalities and social benefit gained from public goods.
Bureaucracy and time lags- Slow procedure
Disincentive effects
Pursuit of self-interest of politicians and public employees
Distributional problems
This failures results in wasting of the state resources and still unable to solve the problem of market failure.
Even if government did not intervene in private sector, producers will still produce goods, just that the cost is not at socially efficient level. For the case of public good, if no government intervention, there is no production. So, it is essential for government to intervene in the case of public good.
ANTI-THESIS: Government should not only intervene in public good and should intervene in other goods too.
Other good also have market failure. Intervention is needed to correct the externalities.
State all sources of market failure.
Externalities
Demerit goods
Inequity
Information failure
Explain at least 3 sources of market failure in detail.
Negative externalities in production. Lead to deadweight loss. Tax is required to reduce the deadweight loss.
Merit good. Under consumption. Require subsidy.
Monopoly power(market dominance). Requires government to intervene(tax, legislation, state ownership, competition policies, maximum price).
CONCLUSION:
Government need to intervene not only in public goods but also in other goods as well. However, too much intervention is undesirable. Government can ensure the correct amount of intervention by using cost benefit analysis (CBA).
-Wee Chong
"The govt should only intervene in the case of public good provision because too much govt intervention is undesirable". Discuss (25m)
For these that did not come today or miss up some point, here are the points. Good luck in writing your essay.
INTRO:
Explain government intervention
Objective of government intervention: to correct inequity or inefficiency
Define economic efficiency: Economic efficiency is achieved when it is not possible to change the existing allocation of resources in a way that makes one person better off without making someone else worse off.
THESIS: government should only intervene in the case if public good provision because too much government intervention is undesirable.
Why government should intervene in the case of public good:
Public has the feature of non-excludability and non-rivalry.
Result in free rider problem- weaken incentive for consumers to offer to pay(no demand revealed) The market failed because no resources will be allocated to their production.
(the graph show the demand curve of gradient 0. Hence, the interception of the demand and supply is at 0 price and 0 quantity)
Since the socially ideal price will be $0.
No supply as producers are profit motivated.
Since the socially ideal price will be $0.
No supply as producers are profit motivated.
Importance of public good: (external benefit of missing market)
Undesirable(inefficient) of over intervention
Problem of government intervention:
Tax-Hard to measure external cost, disincentive to investment.
Legislation- Need a lot of manpower to monitor and enforce-> more money needed -> result in government collecting more tax.
Subsidy- Hard to measure exact value of external benefit, requires high tax to finance.
Direct provision- Hard to estimate the right amount to provide, overconsumption.
Explain government failure:
Information failure- Hard to obtain exact information such as extent of externalities and social benefit gained from public goods.
Bureaucracy and time lags- Slow procedure
Disincentive effects
Pursuit of self-interest of politicians and public employees
Distributional problems
This failures results in wasting of the state resources and still unable to solve the problem of market failure.
Even if government did not intervene in private sector, producers will still produce goods, just that the cost is not at socially efficient level. For the case of public good, if no government intervention, there is no production. So, it is essential for government to intervene in the case of public good.
ANTI-THESIS: Government should not only intervene in public good and should intervene in other goods too.
Other good also have market failure. Intervention is needed to correct the externalities.
State all sources of market failure.
Externalities
Demerit goods
Inequity
Information failure
Explain at least 3 sources of market failure in detail.
Negative externalities in production. Lead to deadweight loss. Tax is required to reduce the deadweight loss.
Merit good. Under consumption. Require subsidy.
Monopoly power(market dominance). Requires government to intervene(tax, legislation, state ownership, competition policies, maximum price).
CONCLUSION:
Government need to intervene not only in public goods but also in other goods as well. However, too much intervention is undesirable. Government can ensure the correct amount of intervention by using cost benefit analysis (CBA).
-Wee Chong
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