Chapter 11 - Government Intervention in the Market.docx -...

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Chapter 11: Government Intervention in the Market What’s good about market and why does the government intervene? Equilibrium in a competitive market results in the economically efficient level of output , where marginal benefit equals marginal cost. Also, equilibrium in a competitive market results in the greatest amount of economic surplus, or total net benefit to society, from the production of a good or service The economic bases for government intervention Although markets often lead to economic efficiency, the majority of economists acknowledge the necessity of some government intervention. Reasons for government intervention include: 1. The legal system and the rule of law 2. Maintaining or enforcing competition: – In Australia, the Australian Competition and Consumer Commission (ACCC) aims to ensure that trade practices foster competition. – Contestable market: A market in which the potential for competition exists due to minimal entry and exit costs. – Governments at times try to 3. Natural monopoly: A situation in which economies of scale are so large that one firm can supply the entire market at a lower average cost than can two or more firms. 4. Externality: A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service 5. Common resource : An extreme case of externalities where no one can be denied access to the resource, but one person’s use of the resource reduces its possible use by others. The resource is rival but not excludable. 6. Public good: A good or service which an additional consumer does not ‘use up’ or prevent another’s use of it, and no one can be excluded from consuming the good or service. It is both non- rival and non-excludable 7. Merit good: A good that is beneficial to society irrespective of the preferences of consumers. – Examples may include museums and art galleries. 8. Asymmetric information 9. Equity 10. Stabilisation (macroeconomic) policy Market Failure and Government Failure Market failure: A situation in which the market fails to produce the efficient level of output. The public interest view of government sees it as the role of government to correct for areas of market failure.

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