Answer to Question #200676 in Macroeconomics for Abdul basit

Question

A market failure occurs when the supply of a good or service is insufficient to meet This results in an inefficient distribution of resources among market participants. Hence government needs to intervene to bring efficiencies. Explain any four tools available for government interventions to deal with the market failures with suitable examples.

Answer 1

The tools

1. Taxation policy: This is a financial charged on business by the government. Taxation raises the price of the goods to reduce demand. For example imposition of tax could lead to stoppage of the business
2. Provision of subsidies: This is where the government pays the cost of production so as to encourage more supply of the resources. For example the government pay for transportation cost of a good increasing the supply leading to efficient distribution in the market
3. Laws and regulation: These re the rules that govern the production and consumption of production. For example, government set the minimum age for buying alcohol
4. Government price controls: The government sets minimum or maximum prices that a good should cost so as to increase demand and supply or discourage them. For example the government can set maximum price for staple food so as to ensure there is equal distribution and consumption