Market Failure Research Paper

819 Words Feb 22nd, 2015 4 Pages
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What are some areas where the MARKET fails to give us adequate quantity of output and desirable price??
(A) Public Goods and Service -- Schools, Highways and Streets, Fire and Police Protection, National Defense, Prisons
(B) Industries that Need to be Regulated -- Utilities, Airlines, Banks -- As our economy changes what other industries also need to be regulated or de-regulated?
(C) Externalities -- Companies produce some type of external cost that affects the community. The company would not voluntarily reduce or
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This is designed to provide an incentive for people to work extra hours and keep more of what they earn.

Changes to the tax and benefit system also seek to reduce the risk of the ‘poverty trap’ – where households on low incomes see little net financial benefit from supplying extra hours of their labor. If tax and benefit reforms can improve incentives and lead to an increase in the labor supply, this will help to reduce the equilibrium rate of unemployment (the NAIRU) and thereby increase the economy’s non-inflationary growth rate.

Changes to indirect taxes in particular can have an effect on the pattern of demand for goods and services. For example, the rising value of duty on cigarettes and alcohol is designed to cause a substitution effect among consumers and thereby reduce the demand for what are perceived as “de-merit goods”. In contrast, a government financial subsidy to producers has the effect of reducing their costs of production, lowering the market price and encouraging an expansion of demand.

The use of indirect taxation and subsidies is often justified on the grounds of instances of market failure. But there might also be a justification based on achieving a more equitable allocation of resources – e.g. providing basic state health care free at the point of use.

Lower rates of corporation tax and other business taxes can stimulate an increase in business fixed capital

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