Discuss in detail state intervention as a consequence of market failures. Market failure can be caused by a lack of information, market control, public goods, and externalities. Market failures can be corrected through government intervention, such as new laws or taxes, tariffs, subsidies, and trade restrictions.
Discuss in detail state intervention as a consequence of market failures, with the aid of relevant graphs (Market Failures)
INTRODUCTION
The purpose of government intervention is to ensure that the right quantity of resources is allocated to the production of output so that society as a whole
[Accept any other relevant introduction]
[Max 2] maximizes its benefits. 🗸🗸
BODY: MAIN PART
- Sometimes government will set the price of a good or service at a maximum level that is  below the market price 🗸🗸
- The government intervene and passes a law that suppliers may not charge more than the maximum price 🗸🗸
- The immediate effect is that quantity supply will drop 🗸🗸
- The original market equilibrium price and quantity is P and Q respectively 🗸🗸
- The price set by the government is P1, at this price the demand will increase to Q1 and the supply will decrease to Q2 🗸🗸
- The difference between Q1 and Q2 is the shortfall that will be created on the market 🗸🗸
- The shortage caused by the price ceiling creates a problem of how to allocate the good since the demand has increased 🗸🗸
- Black markets start to develop
[Mark allocation: Graph 6 and discussion max. 10 marks]
- The appropriate way to intervene in the market by government is by levying taxes as a method to recover external cost 🗸🗸
- The original market equilibrium at e, with P as the equilibrium price and Q as the equilibrium quantity 🗸🗸
- The tax increase will shift the supply curve to the left 🗸🗸
- New equilibrium at E1 🗸🗸
- A tax would raise the price from P to P1 🗸🗸
- The production will decrease from Q to Q1 🗸🗸
[Mark allocation: Graph total 6 marks and discussion max 10 marks]
ADDITIONAL PART
- Explain the supply of undesirable goods in South Africa and how the government can deal with it. 🗸🗸
- Items such as cigarettes, alcohol and non-prescription drugs are examples of demerit or undesirable goods. 🗸🗸
- These goods are often over supplied in the market, due to the fact that the external cost is not added to the market price. 🗸🗸
- Some consumers may be unaware of the true cost of consuming them, their negative externalities. 🗸🗸
- Government can ban their consumption or reduce it by means of taxation. 🗸🗸
- Taxation on these products will increase the market price and hopefully the demand for these products will drop. 🗸🗸
[10 marks]
[Accept any other correct relevant response]
CONCLUSION
The intervention of government ensures that inefficiencies is eliminated and that the market is operating effectively 🗸🗸 [Accept any other relevant conclusion]
[Max 2]