Microeconomic reasons for government involvement and its effects on the market.

Published: 2019-10-07 07:00:00
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The main reason why government embroils in the market is to enact laws and regulations which govern the market transactions, contract formulation and provision of incentives which prevent either consumers or producers from exploitations. They always do this mainly to combat market inequalities through regulations, subsidies and taxations. It thus promotes economic fairness, national unity and national welfare in the economy hence equitable development.

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Difference between merit and demerit goods

Merit goods are goods which have less or no value to the consumers, but the government believes that the good is essential to consumers since they exhibit positive externalities. The private sectors cannot be relied upon to optimally allocate such goods since consumers will incur private costs which constrain them to consume too little. Examples include health care and education. On the other hand, demerit goods are goods which possess negative externalities which results from their utilization. It thus denotes that utilization of such goods results in the emergence of external costs. The costs constraint upsets the whole humanity as oppose to those who consume these goods. Examples include drinking, smoking and taking drugs. Smoking cigarettes, for instance, causes external costs due to health complications which are a burden to the entire society.

These goods can mainly be controlled by the government through persuasion which can be achieved through negative campaigns against excessive use of certain products. Besides, they can contract demand through imposition of taxes on demerit goods. It thus reduces overconsumption of such goods hence reduction of negative externalities.

Disadvantages and advantages of public goods and free rider problem

Due to non-rivalrous, non-rejectability and non-excludability nature, public goods remain very paramount in serving the needs of the society. However, the provision of the public good is viewed as the sole cause of market failure. It is because; pure public goods cannot be provided by the private sector which leads to crowding out effects since the government will act as a monopoly. It thus remains responsibility of the government to decide the quantity of product to produce in the market hence leading to inefficiency and inadequacy in the production process.

On the other hand, free rider problem enables general public to enjoy the services of a certain amenities even without paying for it. It thus improves the living standards of the entire societal system. However, since the good is non-excludable, it posits a challenge to charge the beneficiaries these forms of goods and services once they are provided. It thus leads to exploitation of a section of the society leading to under-provision of goods hence the market failure.

References

Principles of Microeconomics 1.0 | Flat World Education. (n.d.). Retrieved from http://catalog.flatworldknowledge.com/bookhub/21?e=rittenberg-ch15_s02

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