The Use of Cars Causes Market Failure. to Achieve an Efficient Use of Resources It Would Be Better If Governments Intervened to Affect Both the Production and the Use of Cars. Explain the Meaning of the Terms ‘Market

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The use of cars causes market failure. To achieve an efficient use of resources it would be better if governments intervened to affect both the production and the use of cars. Explain the meaning of the terms ‘market failure’ and ‘the efficient use of resources’ and analyse whether economic theory can be used to support this argument. [25] Market failure exists when the operation of a market does not lead to economic efficiency. It is a situation where a free market does not produce the best use of scarce resources. Typical examples are when externalities are present, when there is monopoly power or where it is necessary for public and merit goods to be provided by the government or even when there is possible excessive profits or…show more content…
It might allow the production firms to finally achieve allocative efficiency. In conclusion, the consumption of cars creates both positive and negative externalities. However the negative externalities it is more than its positive externalities so producers tend to overvalue and over produce. The government tries to intervene by imposing taxes on the production of cars. However this is not usually effective as the imposion of taxes depends on the elasticity of the product.The demand of cars is not price elastic. In the diagram above, we have a normal downward sloping demand curve and two upward sloping supply curves. The lower one, the marginal private cost, represents the car firm's supply curve (remember that the firm's supply curve is also its marginal cost curve). The other one, the marginal social cost, represents the true supply curve (and, therefore, the true marginal cost of production) for society as a whole, allowing for the external cost of production. This external cost is represented by the vertical distance between the two supply curves (AB). The car firm does not care about the pollution. The owner is simply interested in maximizing profits. The equilibrium price for him is where demand equals his supply curve, at point B, so output will be Q1 with price at P1. Given that there is pollution, though, the optimal point for the whole of society is at C, where output is Q2 and price P2. Hence, if left to the free
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