Government Intervention Analysis

Evaluate the need for government intervention in the provision of public goods and when asymmetric information exists. 15 marks.

Market failure is defined as a situation in which resources are allocated inefficiently. To fix this inefficiency, governments must intervene in markets. For example, when firms engage in harmful activities, such as oil spills, the government must impose fines or taxes on this kind of behaviour to disincentive it.

A public good is a product that one individual can consume without reducing its availability to another individual (every citizen benefits from the security provided by national defence), and from which no one is excluded (producers cannot stop citizens from using streetlights). Therefore public goods …show more content…
Public goods are usually merit goods (beneficial to its consumers and often create positive externalities (benefit third party users as well)) as well, and are provided at very low costs. Their production and provision is therefore very important. Although the government can produce these goods itself, not only is it very costly for it, and will most likely cause in increase in taxes (to fund the government revenue), some goods or services can be produced privately, enforced by the government. For example, security can be provided privately using regulation - creating laws which require hospitals or schools to provide their own security will be costless to the government, yet will provide a similar service. Depending on the kind of good or service, the government should or should not provide it itself. If the provision of such a good or service can be enforced (it is clearly beneficial to the customers and the firm), then the government should implement policies requiring these firms to provide these goods or services themselves. However, public goods such as street lamps must be provided by the government as the benefits cannot be shown to mainly contribute towards as to defining that a certain firm benefits …show more content…
For instance, in the example of the housing agent, the service of this housing agent can be provided by the government at a fixed income, which is not based on number of sales. This reduces the motivation to sell more houses and to use asymmetric information. Clearly though, this will create a deadweight loss as less will be consumed as housing agents will be less motivated to convince consumers to purchase more houses. This is an illustration of how government provision is less efficient compared to that of the private

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