Question

For both of your identified sources of market failure, describe a standard approach the government can introduce to improve market efficiency. Explain the consequences of each government intervention, supporting your explanations with well-labelled diagrams.

Answer 1

1) market failures occurs when there is inefficient distribution of products. The government can intervene in market in many ways to improve the efficiency of the market and to achieve policy goals. It performs as a legislation in the situations when market failure occurs. Rules and regulations made by government helps to reduce market failure to a large extent. Government has the power to impose taxes and subsidies .  it helps in reducing efficiency burden of industry,so that they will be able to focus on flexibility of new businesses and also to areas with regulatory gap. Even though it has no power to use competitive price system. Government competitive helps in eliminating inequalities prevailing in the market. The ultimate aim of the government is to enable social intervention. Price ceiling is a measure taken by the government to protect the producers of goods. as well as when there is uncontrollable rise in the price of a product they limits to save consumers, known as floor pricing.

2) Government frequent welfare in the market may also affect the market conditions interrelations. most of the economist argue that more than solving issues the intervention of government may create issues.

price cling will encourage inefficient market and reduces economic surplus. consumer surplus is an advantage to to buyers it arises when buy a product with a less amount that they willing to pay. It gradually reduces the economic of products to supply. invalidity marked in the figure in total dreadless surplus. Firms will definitely exploit the opportunity of opportunity. it monopoly unhealthy competition in market. it lacks the promotes of efficiency market. it also has negative impact on generating substantial cost ,unintended consequences.

the maximum limit and minimum limits may cause following issues.

it create a monopoly for suppliers

suppliers may charge high price for products offered

it encourage black markets in the economy.

it leads to shortage of the products .