Reasons For The Government Intervention

990 WordsApr 29, 20164 Pages
ECON1020 ASSIGNMENT 2 Question 1: Reasons for government intervention Governments only intervene in a market to correct for market failures, their objective to restore efficiency and increase economic well-being of society. Market failure occurs when the market fails to allocate resources efficiently, the buyer & seller cannot reach a socially optimal point. Traffic congestion is rivalrous in consumption because there is limited space on the road, however, the road has the ability to be over consumed thus making it a common resource, because one person’s use of the good does not diminish other people’s use of it. The issue of traffic congestion is a negative externality because when one person drives on the road, their presence reduces the speed of everyone else and thus increases the affected party’s journey time. The graph below (figure 1) shows the demand and supply of roads with Qmarket showing the equilibrium that the forces of supply and demand have equalled. The private value is the drivers use of the roads when there is no traffic congestion e.g. non-peak hour. However, because their presences are an negative externality. The demand curve shifts to the left and shown and the new demand curve is the social value, the supply and demand now have an equilibrium at Qopt. The social value is the private value – externality. Question 2: Public Policy Solutions a) The use of congestion charges is a market based policy instrument in which the government will use to
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