9708_m23_qp_42

Market failure refer to the allocative inefficiency of resources within a free market. This could be
shown through the diagram where P = MC

The normal allocative efficiency situation would also be shown by a graph when its MSC = MSB
(the socially optimum level), however, when market failure occur, it deliberately shift either of
the curve out of the socially optimum level. Causes of a market failure could be by a negative
externalities. Negative externalities refers to the side effect, the spill over effect, that made an
impact on the third parties during a production/consumption process. In this case, with the usage
of air travel, there would be an increase in gas emission from the plane and as there is a
culmulative increase in the number of flights, it would result in a negative externalities of toxic
gas emission to the nearby town, may potentially cause outbreak of lungs disease. This is when
the graph shift to the left from S0 to S1

In the initial expectations, if a air travel firm take into account all of the social costs, S1, they
would result in the price of Popt and a production of Qopt. However, since firms (especially in
the free market) seek for profit maximization and they only pay for their private costs, the
external costs would be taken out, S0, firm then will have price set at Pmkt with a higher
production of Qmkt. Thus, Qmkt - Qopt, the negative externality has led to too much production.
Too many scarce resources are being devoted to the production of this product. The market has
failed with a DWL (welfare loss), causing over production with too much toxic waste/pollution
being emitted out.
With market failure, government microeconomic policy would help to address the situation
(giving 2 Advantages and 2 Disadvantages each):
- Taxation -> increase cost -> higher price to consumer -> reduce demand and achieve
allocative efficiency. However, may be difficult to measure the amount of tax require to
address the situation + might cause inflation + takes long time to be effective
- Restriction to number of flights = Direct regulation
- Negative advertising -> However might increase cost to government
Conclusion, some policy could use to address the situation, but is uncertain about the
effectiveness, positive or not, it also depend on the nature of good and what happen to the
economic structure of an economy in the long run

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Globalisation would promote free trade, free movement of capital and labour and the transfer
technology. Cultural and political ties would also be strengthened. Low income countries would
include low lebels of productivity, high dependency ration, low GDP per capital with a
significant dependence on producing and exporting primary goods
An improvement in lving standards is very closely linked with an improvement in economic
performance is measured by increases in GDP per capital and changes in productivity which
enable change in GDP to be achieved. Globalization through trade and technology transfer
should provide opportunities to create more real wealth
Advantages: might have free trade -> more export -> increase balance of trade and economic
growth, labor force export -> injections, learn new technology and production technique from
foreign country => provision of jobs
Disadvantages: excess imports -> low GDP, inflation, dependency on import good and foreign
country, might not work to increase standard of living -> might give adverse effect of lowering
the living standard, firm might go out of business from foreign competitve firms
Conclusion, there is potential to increase standard of living, but still depend on the existing level
of low income household and how severe the standard of living is, as this take time to be address
and might not effective if the current situation if too severe. Appropriate measure of standard of
living is used, don’t entirely rely on the material benefits gained by globalisation
9708_s23_qp_41

Private vs Public
Merit good: benefits to consumer but underconsume, thus casuing problem of postive
externalities -> education is an example

With a provision of subsidies to firms -> can increase the education service provide + price can
be lower -> allocative efficiency can be achieved as P = MC so consumer is able to paid at the
price they desire and not bare the high cost of the service, firm also benefit to cover it cost.
However, without the correct information, consumer demand may stay the same
With a provision of subsidies to individuals -> act as incentive to buy education service as their
education fees can be cover with that subsidies. However, they may not use the subsidies for
education purpose and may become dependent on it

Conclusion, the encourage the use of subsides might not be entirely successful as it is
hard to measure the correct level of subsidy required to achieve allocative efficient
- Opportunity cost to government to expense on other area
- Subsidies in the private sector will mean that access to education is still based on
an ability to pay, this might create inequitable outcomes in society
 Use of other policy, direct provison of education, increase advertising => However,
not clear if the the effect of government intervention will always be positive, some
maybe more effective depend on the nature of good or service under consideration

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Budget surplus: government revenue > government spending

Will increase unemployment in SR:
- High interest rate to firm => redanduncies
- Government not spending => no subsidies provide => firm have no incentive to produce
more and as the demand for labor is associated with the supply of goods needed to be
made and demand => not hiring so low unemployment
- No subsides to training labor force to cope with the continously changing economic
structure
Easier to control balance of payments deficit (more spending on import than export revenue):
- With sufficient government revenue collected => in the LR government may change to
budget deficit => economic growth => more export
Conclusion: the affect to unemployment will depend on the exisiting unemployment level,
negative effect if country is having a lot of spare capacity
9708_s23_qp_42

Market failure refer to the allocative inefficiency of resources within a free market. The normal
allocative efficiency situation would be shown by a graph when its MSC = MSB (the socially
optimum level), however, when market failure occur, it deliberately shift either of the curve out
of the socially optimum level. Causes of a market failure could be by a negative externalities.
Negative externalities refers to the side effect, the spill over effect, that made an impact on the
third parties during a production/consumption process. Take an example from a chemical
production firms… This is when the graph shift to the left from S0 to S1

In the initial expectations, if a chemical firms firm take into account all of the social costs, S1,
they would result in the price of Popt and a production of Qopt. However, since firms (especially
in the free market) seek for profit maximization and they only pay for their private costs, the
external costs would be taken out, S0, firm then will have price set at Pmkt with a higher
production of Qmkt. Thus, Qmkt - Qopt, the negative externality has led to too much production.
Too many scarce resources are being devoted to the production of this product. The market has
failed with a DWL (welfare loss), causing over production with too much toxic waste/pollution
being emitted out.
With market failure, government microeconomic policy would help to address the situation
(giving 2 Advantages and 2 Disadvantages each):
- Government direct provision/promotion of the EVs
- Restriction on driving petrol vehicle
- Indirect tax on petrol vehicle
- Subsidies to firm to produce more
In conclusion, depend on the impact of the price and output may take a long time to be effective,
country welfare (how high is the pollution to be taken into consideration? can the consumer pay
afford it - poverty?), how much attention government are willingly to give to address this
situation? – expenses may spend better elsewhere