Public Policies Used To Solve Market Failure Economics Essay

Public Policies Used To Solve trade Failure Economics EssayMarket is defined as a group of buyers and sellers of a particular good or service. in that location are many a(prenominal) different types of merchandises such(prenominal)(prenominal) as stock grocery store, currency merchandise and more. Market is efficient when the market place is perfectly competitive. If a market is non perfectly competitive, the market tribulation volition proceed.Market trouble as well as occurs when the allocation of resources in a sluttish market is inefficient. Market failure occurs when the market is non in perfectly competitive. There are many reasons to cause market failure. The main causes of market failure area) nix ExternalitiesExternalities are defined as the uncompensated impact of one soulfulnesss actions on the well-being of a bystander. Negative externality such as the work of environmental befoulment set up cause the bare(a) tender terms(MSC) of merchandise to excrete the marginal hidden cost(MPC) according to the draw belowIn the process of intersection, the firms pull up stakes cause the taint of the environment. The pollution is bad for humanity health so that the marginal kind cost(MSC) is authorise the marginal private cost(MPC). The optimum of production is at Qs, MSB is equal to MSB. The firms get out adduce goods at Qp, where MPB is equal to MPC. The excess of production non only does not promote the semi commonplace welfare but as well as causes more pollutions to the environment. As a result, the market go out go inefficient.b) Positive ExternalitiesThe peremptory externalities such as the provision of education and healthcare undersurface cause the marginal social utility(MSB) of consumption to exceed the marginal private benefit(MPB) according to the plot belowIn a free market, the consumption exit be at Qp where the private benefit equals to the private cost. However, this is socially inefficient because t he social benefit is exceed to the social cost. Therefore, that is under-consumption(Qs-Qp) of the positive externality. The social efficiency volition occur at Qs where the social cost equals social benefit.c) meritoriousness and Demerit goodsMerit good is a good that population do not take a leak its true benefit such as the raft underestimate the benefit of education. The examples of merit goods are education and healthcare. These goods usually take in positive externalities. Therefore, thither leave be a under-consumption of merit goods in a free market.Demerit good is a good that people do not realise the costs of doing something such as smoking and drugs. These goods usually have nix externalities. Therefore, there volition be over-consumption of demerit goods in a free market.d)Public goodsThe private sectors in free markets cannot profitable supply to consumers public goods that are motivationed to meet peoples demand. So that the public goods are mostly fork outd by politics.e)Monopoly PowerMarket that controlled by monopoly can cause under-production and higher(prenominal) prices than would exist under condition of competition.f)Factor immobilityFactor immobility will cause unemployment hence productive inefficiency.When market fails, the market will assume into position of inefficiency. It may cause unfair distribution of income and home to the public. legion(predicate) firms attach the quantity of goods supplied in order to earn more profit. It may cause the pollution in the environment as the firms are not willing to protect the environment whenever they produce goods. Besides that, unemployment will occur because of the exclusion of labor by the machines when the firms are able to improve the productivity. There will be alike an undersupply of public goods. The private sectors are not willing to produce public goods as the consumers do not need to pay for these goods so that they will not earn profit from providing the public go ods.To address these public issues, the regimen will execute some policies to decide the market failure such as imposing taxes on forbid externalities.In the diagram above, the marginal social cost(MSC) of production will exceed to the marginal private cost(MPC). The governing body impose the taxes to the sellers and the imposition of taxes will join on the production cost of the sellers. Then, the supply curve(PMC) will commove to the left. The quantity of production will decrease from Qp to Qs where the optimum outfit is and the social welfare will be maximized.New Mexico Legislature is supposed to increase the state faggot tax from 75 cents to $1.66 per pack this year. The purpose of imposing the tax is to issue the tobacca use and save lives. The increasing of tax will discour eld people from smoking. Increasing the cigarette tax is one of the most effective slipway to reduce smoking, especially among kids.From the diagram above, the production of tobacca of marginal social cost(MSC) is exceed to the marginal private cost(MPC) and the sidetrack of tobacca of the sellers is at Qp. New Mexico Legislature imposed the cigarette tax to the railroad siding of tobacca of sellers. So that, the supply curve(S=PMC) of tobacca will shift to right. The output of tobacca will decrease from Qp to Qs as the tobacca tax will increase the cost of production of tobacca. As a result, the supply curve of tobacca will move to left and equals to marginal social cost(MSC). At this moment, the optimum output of tobacca is at Qs. The imposition of cigarette tax will reduce the output of tobacca and discourage people from smoking.Taxes on invalidating externalities will raise the tax revenue for the administration and reduce the pollution of environment.The second polity that can inhibit the market failure is to provide bounty on positive externalities. The brass provides subsidy to the firms to pay part of cost for them to encourage more production.From the dia gram above, the production of marginal social benefit(MSB) is exceed to the marginal private benefit(MPB). The government provided subsidy(P2-P1) to the firm to decrease their cost of production. As a result, the firm will increase the output from Qp to Qs. Then, the social welfare will be maximized.For example, Malaysia government plans to provide a subsidy of RM30bil to enhance primary and secondary coach education nationwide which is one of the plans of Budget 2010.From the diagram above, when our government provides a subsidy of RM30bil on education, the operating cost of aim will decrease. Then, the school will have enough capital to build more facilities and provide more educational plans from Qp to Qs for the students. The students will get more benefit from studying. At this moment, the social welfare will keep increasing till the marginal social benefit(MSB) equals to marginal social cost(MSC).The third policy is to change the quality right. This will happen when the gov ernment gives the topographic point rights to certain people such as the fishermen could be given the property rights to a river. When banish externalities occurred, the owners of property could sue a company who caused damage or pollution such as the fishermen can sue a chemical factory which begrime the river. It may charge some social costs to the chemical factory. The government pursued this policy to reduce the pollution of environment so that the negative externalities could be extinguishd.In addition, the government will also impose the laws and legislation to prohibit the unhealthy behaviour of people such as legalizing the age for smoking and banning on drunk driving. The laws and regulations must be unsophisticated and easy to understand to the public. Due to a reduction in negative externalities, the marginal social cost will decrease. So that, imposing the laws and regulations is also a policy to overcome the market failure.For example, in New Zealand, it is unra tified to sell tobaccos and cigarettes to person aged uner 18. It is also mislabeled for a person over 18 to give a person under 18 cigarettes or tobaccos in a public place. Another example is gross sales of tobacco to person aged under 18 are illegal in all Australian states. The purpose of legalizing the smoking by some(prenominal) governments is to reduce the consumption of tobaccos. It may help to decrease the negative externalities for better efficiency of the market.Finally, the other policy is to give the pollution permit. The government can give a pollution permit to a firm to doctor his output. The more the firm produce, the more polluted the environment is. Therefore, the marginal social cost will keep increasing and market failure will occur. The government will give the pollution permit to the firm such as limiting the firm to produce only 100 wholes carbon dioxide per year. As a result, there is an incentive to pollute less and the negative externalities will be e liminated.ConclusionThe public policies implemented by the government can successfully solve the market failure. The main causes of market failure is the externality. It can divide into negative externality and positive externality. Government will impose the tax to the firms to decrease their output as every unit of good they produce will cause the pollution of environment. The implimentation of this public policy can reduce the pollution of environment but also to eliminate the negative externalities for efficient market.Secondly, the government will also provide subsidy to the firms. With this policy, the production cost of the firms will decrease and their output will increase. The market will be efficient as the subsidy on positive externalities forces the marginal social cost equals to the marginal social benefit. Thirdly, the government will implement the policy of changing the property rights. By giving the property rights, the owner of the property can sue a company which c aused pollution to their property such as the lands. It may help to reduce the pollution of the environment and eliminate the negative externalities. So that, the market failure can be overcome.The government will also impose the laws and regulations to prohibit people from the unhealthy behaviour such as smoking and taking drug. The executing of this policy can effectively increase the social benefit. So that, the market failure will turn into an efficient market. Lastly, the government will also give the pollution permit to the firm. This policy can limit the output of carbon dioxide of the firm. It can reduce the negative externality of air pollution. As a result, the market will be efficient by reducing the negative externalities.For archieving an efficient market, the government will implement the public policies when market failure occurred although the government needs to spend a high cost on them.