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Chapter 6 Market Failure and Government Intervention - Coggle Diagram
Chapter 6 Market Failure and Government Intervention
Price mechanism
Deciding 'what to produce'
Signalling and incentive
Deciding 'how much to produce'
Signalling and incentive
Deciding 'how to produce'
Incentive
Deciding 'for whom to produce'
Rationing and incentive
Assumptions
Production only carried out by firms
Decision making based on self-interest
Perfect market conditions
Production and consumption does not generate externalities
Rational decision making
Consumers
Maximise self interest
Producers
Maximise profits
Government
Considers the perspective of society as a whole
Public goods
characteristics
Non-excludability in consumption
Non-rejectability in consumption
Non-rivalry in consumption
Negative externality
Due to production
government intervention
Market-based policies
Taxing product
Taxing emission/pollution e.g. carbon tax
Incentivising the use of more environmentally friendly methods of production
Command and control policies
Imposition of quota on goods being produced
Banning production of goods
Permits (quota on emissions)
Tradable pollution permits
Nationalisation
Moral suasion
Educating producers
Encouraging producers to switch to less pollutive alternative
Due to consumption
government intervention
Market-based policies
Taxation/charges
Incentivising the consumption of a substitute good
Incentivising consumers to switch to a less pollutive alternative
Command and control policies
Quota
Banning consumption
Moral suasion
Educating consumers
Changing consumer preference
Positive externality
Due to production
government intervention
Market-based policies
Supply-side subsidies
Moral suasion
Providing positive publicity
Command and control policies
Supplementing the production of goods
Due to consumption
government intervention
Market-based policies
Subsidies
Demand-side
Supply-side
Free provision (100% subsidised)
Command and control policies
Raising supply of goods
Compulsory consumption
Moral suasion
Educating consumers
Information failure
Imperfect information
Overconsumption
Perceived benefits > Actual benefits
Perceived costs < Actual costs
Underconsumption
Perceived benefits < Actual benefits
Perceived costs > Actual costs
Government intervention
Command and control
Legislation on the provision of information
Moral suasion
Educating consumers
Market-based policies
note: does not resolve root issue of imperfect information
Asymmetric information
Adverse selection
Sellers have more information than buyers
Government intervention
Command and control policies
Legislation on provision of information
Legislation to protect consumers
Buyers have more information that sellers
Government intervention
Command and control policies
Provision of insurance
Moral hazard
Government intervention
Market-based policies
Co-payment
Factor immobility
Geographical immobility
Occupational immobillity
Government intervention
Market-based policies
Improved education system, training and skills upgrading schemes
Improved transport systems and networks
Incentivise firms
Efficiency and equity
Complementary goals of equity and efficiency
Conflicting goals of equity and efficiency
Efficiency with less equitable outcomes
Equity with less efficient outcomes
Government failure
possible causes
Information gaps
High administrative costs
Unintended consequences
Political considerations