(1) Clearly explain how the existence external diseconomies in production can bring about over production and loss of social welfare? Use words and diagrams
(2) Explain how government intervention can promote social wellbeing and solve the problem of market failure?
(3) Explain why government interference into the market may not be desirable?
Senior Lecturer, Economics, UNN
Dr Anthony Orji is a Ph.D holder in Economics and a lecturer at the Department of Economics, University of Nigeria Nsukka.
He obtained his B.Sc, Msc and Ph.D Degrees from the University of Nigeria, Nsukka and a Post Graduate Diploma in Sustainable Local Economic Development (SLED) from Erasmus University, Rotterdam Netherlands.
2). government intervention in the market can solve market through: minimum price
b). maximum price
C). minimum wages
D). Nudge
Minimum price:This involve the government settling a lower limit for price ,e.g the price of potato could not fall below 13p.
The minimum price could be set for a few minutes.
*Increase farmers income
* Increase wages
*Make demirit goods more expensive .for e.g a minimum price for alcohol has been proposed.
Maximum price
This involve putting a limit on any increase in price e.g the price of housing rent cannot be higher the £300 per month .
*The good is socially important e.g good quality housing is important to labour productivity and a nation health.
*The maximum price will be set below the equilibrium .This makes sure the price is less than the market clearing price.
Nudge,:This is a different kind of government intervention .it is a government policy to influence demand indirectly.For examples,utting cigarettes behind closed. Makes it harder or less entiring for people to buy .The government may also place flashing speed limit sign to give a simple face to driver under the speed limit, but an unhappy to driver sexceding the speed limit.
2). Government interference In the market can be desirable because of the possibility of reducing potential political risk,and the cost is that such a government need to mobilize public or private resources to share corresponding economic risk.
b). They help to promote other goals such as national unity and advancement .most people agree that government should be provite a millitary for the protesting of citizens, and this can be seen as a kind of interve.
Social economy factor
Government may also interve In market to promote general economic fairness. Government often try, through taxation and welfare programs, to reallocate financial resources from the wealthy to those that are most in need.
SIR I WILL SUBMIT NO 1 IN THE EVENING.. I’M FINDING IT DIFFICULT TO TRANSFER FROM MICROSOFT WORD TO MY PHONE.
QUESTION 2.
Government intervention does have more advantages than the disadvantages. It is still being argue till date if government interfering in market economy does more good than bad.
Some of my points are well detailed and self explanatory.
a Maximizing social welfare: Government interfering in the market feature in this case causes breaking up of monopolists& regulating negative externalities like pollutions.
b They try to combat market inequalities through regulation, taxation & subsidies.
c Government may sometimes intervene in market to promote other goals such as national unity & advancement.
d Inefficient market.
e To promote general economic fitness E.g Former USA president Bill Clinton signing welfare reform.
QUESTION 3
It’s noted that for every advantage there is a disadvantage. Even with the support government contribute in marketing features they also do harm.
It’s noted here why it won’t be too desirable to allow the government interfer in the market. Without government interference firms can exploit monopoly power to pay low wages to workers and charge high prices to consumers.
A. We are liable to see the growth of monopoly power.
B Inefficient allocation of resources.
C Personal freedom: Government intervention takes away individual decision on how to spend &act.
D Government influenced by mad political pressure group then spend on inefficient projects which then leads to a useless outcome.
UNN/JEW/SOCS/710.
ECO 001
1. The existence of external diseconomies leads to over population which in turn leads to market failure because a peoduct or seevice price equilibrium does not qccurately affect the real cost and the benefit of that price or profit.
2.A. Legislation: enating specific law;for example banning smoking in restaurant or making high school attending mandatory
B. Direct provision of merit and public goods: government control the supply of goods have positive externalities. For example by supplying high amount of education parks and libraries
C. Taxation: placing tax on certain goods to reduce the use of internalized external cost. For eg placing a ‘sin-tax’ on tobacco goods and subsequently increasing the cost of tobacco consumption
D. Subsidies: reducing the price of goods for public benefits that is gained. For eg lowering college tuiton fee because society benefits from more educated workers
E. Tradeable permit: peemits that allows firms to produce a certain amount of something commonly pollution. Firms can trade permits with other firms to increase or decrease what they produce. This is the basis behind cap and trade, an attempt to reduce pollution.
3.A. Lack of incentives: In a free market , individuals has a profit incentives to innovate and cut cost but in a public sector.Therefore it can cause an inefficient production.For eg, state owned industry have frequently been inefficient, overstaffed and produced goods not demanded by consumers.
B. Political pressure groups: Milton Friedman just quipped.’There nothing as permanent as a temporary government bailout’. He was referring to farming subsidies.
C. Less choice: Often government intervention in the economy(nationalisation of industries) have been associated with less choice. Government produced service has a monopoly. Command economics often has little choice as government decides what to produce.
D. Impact of personal freedom: An increasing aspect of government intervention is through effort to shift consumer behavior. For eg refuce congestion, improve health through reducing smoke rate and a healthier lifestyle.This includes taxes,behavioural influences and regulations.Sometimes people can feel that’s overbearing to their individual choice.
1. An externality can be both positive or negative and can stem from either the production or consumption of a goods or service.
2. Government may also intervene in market to promote general through regulation can directly address these issues.
Market failure can be solve through government intervention, such as new laws or taxes, tariffs, subsidies, and trade restrictions.
3. Government intervene in markets when they inefficiently allocate resources.
b. The government tries to combat market inequalities through regulation, taxation, and subsidies.
c. Government may also intervene in markets to promote general economic fairness.
d. Maximizing social welfare is one of the most common and best understood reasons for monopolies and regulating negative externalities like pollution.
e. Government may sometimes intervene in markets to promote other goals, such as national unity and advancement.
Eco 001 assignment
2. The government tries to combat market inequities through regulation, taxation, and subsides. Government may also intervene in markets to promote general economic fairness.
Government intervention is when the state get involved in markets and taxes action to try to correct market failure and so improve economic efficiency.
3. A price floor is a type of government intervention that is used when the government determines that the price of a good and service is too low for firms to earn a profit. A subsidy causes the supply curve to shift right, decreasing equilibrium price and increasing equilibrium quantity.
1) it can arise due to constraints imposed by the environment within which a firm or industry operates, it is also a situation of overcrowding where employees and machines get in each other’s way,lowering operational efficiencies
2) governments intervene in markets to address inefficiency,the government tries to combat these inequities through regulation taxation and subsidies
3) without government intervention firms can exploit Monopoly power to pay low wages to workers and charge high prices to consumers
[1] Indicate, using a well-drawn diagram to explain how the existence of external diseconomies in production will bring about over production and loss of social welfare?
How the existence of external diseconomies in production will bring about over production?
External diseconomies are not suffered by a single firm but by the firms operating in a given industry. Diseconomies bring about over production due to much concentration and localization of industries in a particular area beyond a certain stage. As output increases, the logistical costs of transporting goods to distant markets can increase enough to offset any economies of scale.
Localization leads to increased demand for transport and, therefore, transport costs rise. Similarly, as the industry expands, there is competition among firms for the factors of production and the raw-materials.
This raises the prices of raw-materials and other factors of production. As a result of all these factors, external diseconomies become more powerful and breed negative out comes.
How the existence of external diseconomies in production will bring about loss of social welfare?
Details explanation of how it can lead to loss of social welfare.
(a). Diseconomies of Pollution:
The localization of an industry in a particular place or region pollutes the environment. The polluted environment acts as health hazard for the labourers. Thus, the social cost of production rises.
(b). Diseconomies of Strains on Infrastructure:
The localisation of an industry puts excessive pressure on transportation facilities in the region. As a result of this, the transportation of raw materials and finished goods gets delayed. The communication system in the region is also overtaxed. As a result of the strains on infrastructure, monetary as well as the real costs of production rise.
(c). Diseconomies of High Factor Prices:
The excessive concentration of an industry in a particular industrial area leads to keener competition among the firms for the factors of production. As a result of this, the prices of the factors of production go up. Hence, the expansion and growth of an industry would lead to rise in costs of production.
[2] How can government intervention promote social welding and solve the problem of market failure?
I) Government intervention can promote social wellbeing through reduction of monopoly, subsidy, price control etc.
Ii) The common interpretation of market failure is the failure of a market to live up to the standards of perfect competition that leads to an efficient distribution of goods and services.
III) A market failure is when there is an inefficient distribution of goods and services that leads to a lack of equilibrium in a free market.
IV) The law of supply and demand is meant to lead to an equilibrium in prices, and when it does not it indicates a factor in the market has failed.
V) Market failure can be caused by a lack of information, market control, public goods, and externalities.
Vi) Market failures can be corrected through government intervention, such as introduction of new laws or taxes, tariffs, subsidies, and trade restrictions. When this is done, it will in turn correct the indices responsible for the market failure and boost the social welfare.
[3] Why government market intervention cannot be desirable?
There is no iota of doubt that government market intervention is a great tools towards solving the problems of market failure and boost social wellbeing. But in the same vain, there are cases that may be posed and render government intervention not to be desirable. These cases include:
I) Lack of incentives: In the free market, individuals have a profit incentive to innovate and cut costs, but in the public sector, this incentive is not there. Therefore, it can lead to inefficient production. For example, state-owned industries have frequently been inefficient, overstaffed and produce goods not demanded by consumers
Ii) Political pressure groups: Milton Friedman once quipped ‘There is nothing as permanent as a temporary government bailout.’ He was referring to farming subsidies. Introduced in the 1930s during the Great Depression to alleviate a farming recession. After the Second World War, no government dared to remove subsidies because farmers were a powerful pressure group who wanted to keep the subsidies.
III) Government failure: Government failure is a term to describe how government intervention can cause its own problems. For example, the government may take decisions for short-term political consideration which lead to an inefficient outcome. For example, government tariffs to protect domestic industry spark off a trade war, where the economy contracts.
IV) Impact of personal freedom: An increasing aspect of government intervention is through efforts to shift consumer behaviour – e.g. reduce congestion, improve health through reducing smoking rates and a healthier lifestyle. This includes taxes, behavioural influences and regulations. Sometimes people can feel this is overbearing on their individual contracts.
V) Less choice: Often government intervention in the economy (e.g. nationalisation of industries) has been associated with less choice. Government produced services have a monopoly. Command economies, often had very little choice as government decided what to produce. Choice is an important element of economic freedom and being able to maximise individual welfare. (Not all government intervention leads to less choice.
In a nutshell, why government market intervention cannot be desirable are:
I)Government provision may reduce the choice of individuals who prefer to choose their private insurers and doctor.
Ii) The private sector may have profit incentives to cut costs and offer innovative new treatments that would be desired.
III) With government provision, services may be limited by tax revenue. It is more likely that services will be rationed leading to longer waiting lists and some treatments not available.
IV) Government health care will require higher tax. Higher income tax may lead to lower incentives to work (though whilst taxes will rise, health insurance costs will be lower).