Examples Of Government Failure

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Examples of the government failures. 1. Government can award subsides to firms, but this may protect inefficient firms from competition and creates barriers to entry for new firms, because prices are kept artificially low. Subsidies and other assistance can lead to the problem of moral hazard. 2. Taxes on goods and services can rise prices artificially and distort the efficient operation of the market. In addition taxes on income can create a disincentives effect and discourage individuals from working hard. 3. Government can also fix prices, such as minimum and maximum prices, but this can create distortion which leads to; - Shortages, which may arises when government fixes prices blow the market rates because public health care is provided …show more content…

The recipients of such advantages are known as free riders in light of the fact that they don't need to pay for it. Most legitimacy products create positive utilization externalities, which beneficiaries don't pay for. For instance, with social insurance, private treatment for irresistible illnesses gives an impressive advantage to others, for which they don't pay. Likewise, with instruction, the abilities obtained and information learnt at college can advantage the more extensive group from multiple points of view. The administration ought to make such monetary approaches which can bring about positive externalities and ought to build supply and interest for those items that make outer advantages. Increasing supply Government should give grants and subsidies to producers of such products, which will result in lower cost of production and increase in supply, hence creating more external benefits. Increasing demand The economic concept of decrease in price resulting in increase in demand can also be applied to generate external benefit. Reduction in price of the product will increase the demand and create positive externalities. For example reduce in tuition fees of Szabist will encourage more young generation to study at …show more content…

For example, a steel producing firm might pump pollutants into the air. While the firm has to pay for electricity, materials, etc., the individuals living around the factory will pay for the pollution since it will cause them to have higher medical expenses, poorer quality of life, reduced artistic appeal of the air, etc. Thus the production of steel by the firm has a negative cost to the people surrounding the factory--a cost that the steel firm doesn't have to pay. HOW TO SOLVE NEGATIVE EXTERNALITY PROBLEMS Negative externalities are a property rights problem. In other words, if there are irrelevant transactions costs, as long as someone owns the rights to the air around the steel mill, the efficient outcome will prevail. For example, if the steel mill owns the rights, then the individuals that live around the mill will be willing to pay the steel mill not to produce up to the cost that they are acquiring from health care, reduced artisticappeal of the air, etc. Another way to solve the negative externality problem is to simply tax the producer the amount of the negative externality. CAUSES OF MARKET FAILURE 1. Incomplete

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