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Market Intervention - Coggle Diagram
Market Intervention
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Market Failure
In a market failure, the market fails to allocate goods efficiently. Market prices only reflect the business costs in producing e.g. wages, materials. They ignore wider social costs or social benefits.
Demerit Goods- e.g. alcohol, tobacco (perhaps sugar in the future). The market will over-provide these.
Externalities- e.g. pollution, congestion, noise. Factory costs will not reflect the impact on third-parties, such as when the soot and pollution from chimney causes an increase in asthma attacks. Note some products have wider benefits for the community which are not charged for in the ticket price
Merit Goods- e.g. education, health care, housing. The market will under provide these. The market will provide merit goods only up to the point that they are profitable.
Monopolies- e.g. Microsoft windows. When one firm dominates a market, then it may be able to exploit consumers by charging higher prices, confident that consumers have no close substitute.
Public Goods- e.g.street lighting, lighthouses, public parks, defence. The market fails totally and they would not be supplied. Non-payers (free riders) cannot be stopped from accessing the good or service
Maximum Price
Governments sometimes set a legally imposed maximum price in a market that suppliers cannot exceed. To be effective the maximum price must be set below the equilibrium price.
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Minimum Price
Sometimes a legally imposed minimum price is set in a market. The good cannot be sold for less than the minimum price.
Minimum prices are imposed in order to encourage production or to give producers (or workers) a guaranteed income, it is the minimum price a producer will receive for there product. As the minimum price is above the EP supply will be greater than demanded.
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