Assessment Assessment 3 Outcome covered 3 Assessment instructions You are asked
ID: 1130113 • Letter: A
Question
Assessment Assessment 3 Outcome covered 3 Assessment instructions You are asked to complete the guide words in length. Relevant short investigative exercise. As a guide your responses may in total be approximately 800 t0 1,00daced in an material collected during your investigation may be fi and, where appo response to the questions must be in your own word sources should be attributed oe atibu must be i00 to 1,000 words inn You are to answer both questions. But ensure that you select only one policy area in question 2 In your answer you must refer Explain what is meant by the term market failure to the role of government in relation to each of the to 1 Merit goods Public goods Imperfect competition Externalities 2 Select one current government policy on either: Welfare Competition Environment And: a Explain the policy selected and descibe the instruments used to achieve your chosen policy. Evaluate the success or failure of your chosen policy in relation to its use within the UK bExplanation / Answer
1. Market failure refers to failure of competitive market to allocate resources efficiently or distribute goods efficiently. In the case of market failure, pareto optimality conditions are not satisfied. Causes of market failure:
a) Externalities: These can be defined as an impact of production and consumption of products affecting the third party. Externalities can be either positive or negative.
b) Public good: These are the goods that are characterised by non-excludability and non-rivalry. By non-excludability, it means that a good that benefits an individual can be used by others too to derive the same benefits. Non-rivalry implies that the enjoyment of using a product does not reduce the satisfaction of those who have been using it from a certain time. Example: Defense
c) Information asymmetry: It deals with the study of decisions in transactions, wherein one party has access to more or better information than others. Due to information asymmetry, the following two problems occur:
(i) Adverse selection: This implies taking the advantage of asymmetric information before transaction. For example, a person may be more eager to purchase life insurance due to health problems than, someone who is healthy.
(ii) Moral hazards: This implies taking the advantage of asymmetric information after transaction. For example, if someone has car insurance he may commit theft by getting his car stolen to reap the benefits of the insurance.