Economics Question on the "Fat Tax": “Unhealthy foods should be taxed.” Discuss. [25]

“Unhealthy foods should be taxed.” Discuss. [25]

This paper discusses if a “fat tax” should be imposed. What is a fat tax? Generally, a fat tax is a tax on the producer of unhealthy foods, for instance fast food or fatty food producers, and in particular a fat tax is an indirect tax that aims to reduce the supply of unhealthy food. A fat tax is considered by and levied by the government. This Economics paper argues that a tax on unhealthy food will raise equilibrium prices and lower the equilibrium quantity transacted, and hence will save lives by both saving private individual lives and also by addressing the societal market failure of negative externalities; yet on the other hand, there are certain other economic and non-economic perspectives that governments should also consider before implementing such a tax.

Arguments for a Tax on Unhealthy Foods: Personal Cost of Obesity – A Fat Tax Saves Lives

First and foremost, eating unhealthy foods increases the likelihood of obesity, early death, depression and a whole range of health problems. A fat tax will raise the price of such foods. Higher prices caused by such a tax would discourage people from consuming unhealthy foods. It may not stop people eating fatty foods completely, but this is not the primary aim. Reducing consumption of fatty and salty foods would have a significant benefit in improving health and personal wellbeing. Currently, many people from all around the world die from heart attacks and strokes each year. As well as saving lives, reducing obesity will also improve consumers’ quality of life. According to the diagram below, a tax will shift the supply curve to the left, and thus raise the price of the good and lower the quantity transacted. This translates into less unhealthy foods consumed.

Arguments for a Tax on Unhealthy Foods: Externalities of Unhealthy Foods

Unhealthy eating has an impact, not just on consumers, but also on the rest of society. An externality is a third party spill-over effect, and can be classified as negative or positive. Fatty foods, by harming consumers, have massive external costs to society and as such produce negative externalities. For instance, there are medical costs for treating obesity, and worse still these explicit costs also come with opportunity cost, the cost of the next best alternative forgone, which means that other patients could potentially receive less attention and other more pressing diseases receive less funding. Also, there would be lost productivity at work not just due to obesity but also to illness, premature death, and a whole host of health-related problems that affect society negatively and have to be paid for. Therefore, the government should collect sufficient taxes from the producers of unhealthy foods to pay for the external costs that they create. It is the same principle as to why cigarettes are taxed, because cigarettes cause pollution, and harm or kill consumers and third parties alike.

While it can be argued that the external cost of unhealthy foods is not easy to calculate, due to imperfect information, this is not a reason to avoid having a fat tax. The idea is that at the moment society is effectively subsidising the consumption of unhealthy foods, and ultimately it is the taxpayer who has to pay for this in terms of healthcare, workplace, and productivity costs to society.

Arguments against a Fat Tax: A Tax on the Poor

On the other hand, a fax tax could be seen as politically unacceptable, because it could be perceived as just another scheme to raise government revenue. Thus, a tax on unhealthy foods should be revenue neutral and not about raising total tax revenue, but about switching the tax burden. The revenue raised from the fat tax could be used to subsidise healthy foods, pay for healthcare services, or reduce other types of taxes.

Also, a fat tax can be seen as a tax against the poor, who tend to eat fast food or are unable to afford more expensive healthier food. The argument is that those on low incomes are more likely to consume unhealthy foods and therefore this tax will increase inequality as it targets the poor. However, it can be argued that if a tax on fatty foods saves lives, we should not avoid implementing it because, in fact, it is the poor who will mostly benefit because their lives will be saved. If the government is concerned about the impact of a fat tax on equality, the revenue can be targeted to the poor by redistribution, for example by transfer payments. Thus, an increase in inequality need not occur from a fat tax.

Arguments against a Fat Tax: Paternalism

Some people argue that a fat tax smacks of paternalism (what is sometimes known as the “nanny state”). Who is the government to tell people what to eat? It would seem that on the surface the government is telling people what to do. However, the whole point is that consumers are still free to consume as much salty and fatty foods as they like. It is just that now consumers have to pay a fairer reflection of the true cost to society, which means that they have to internalise the negative externality, the negative harm to society which results from their health problems caused by such foods. Thus, society has a right to make consumers pay for the economic cost of unhealthy food. Also due to imperfect information, consumers may not know the full damage done by unhealthy food. Hence, paternalism might actually be good for them. As an additional benefit, consumers will probably live longer, and healthier, and also feel happier.

Arguments against a Fat Tax: Inelastic Demand

Some detractors could argue that the demand for fatty foods could be inelastic, and as such a tax would not reduce the quantity demanded by a lot. This is because, ceteris paribus, a relatively inelastic demand curve means that a huge increase in price would lead to a small fall in quantity demanded. However, while demand may be inelastic for fatty foods, they will still reduce consumption by a certain amount, and this is the intended effect. For example, a huge tax on a fast food meal may reduce consumption by say 30%. Instead of eating ten burgers a week, some consumers may only consume seven burgers a week after the tax is imposed. This reduction of 30% will have a big impact on improving the consumers’ health. The aim is not to stop consumers eating unhealthy foods, but reduce excessive consumption, because in moderation fatty and salty foods do not cause a fundamental health problem.

Conclusion

In conclusion, a fat tax should be imposed to save individual lives, and, above all, to reduce the massive negative externalities of illness and lowered productivity imposed upon society. The fat tax will force consumers to internalise the negative externalities whilst allowing them to enjoy, in moderation, fast food, and therefore in the final analysis unhealthy foods should indeed be taxed. 

JC Economics Essays: Tutor's Comments - This Economics paper is about an interesting and current topic that many countries worldwide have discussed: should they implement a fat tax, or a tax on unhealthy foods? How should this fat tax be implemented? This essay makes interesting and easy reading, and covers a lot about inequality and other related issues, that you should definitely study and write about during an Economics examination on this topic of the fat tax. However, my usual tutor's comment applies: other than a diagram or two, how would you make this paper better? What would you write differently here? What other Economics materials and points could you add in to make this Economics paper better? Remember to give it a good, critical viewpoint as well. As an Economics tutor, one major improvement would be that the conclusion could be a little bit more evaluative and considered - which means that the student should have an opinion (or two) and a justification that weighs up arguments, and is nuanced, balanced, and perhaps even "personalised". Thanks for reading, and do give this serious thought!

(b) Evaluate the idea that a government should use tradable permits to correct the market failure resulting from the existence of a negative externality. [15]

(b) Evaluate the idea that a government, for instance Singapore’s government, should use tradable permits to correct the market failure resulting from the existence of a negative externality. [15]

Adapted from an actual Economics Examination: November 2008, H1, A-Level

This paper discusses whether a government such as that of Singapore should use a policy of tradable permits to try to correct market failure resulting from the existence of a negative externality. An externality is a third-party spill-over effect affecting the welfare of a third-party in production/consumption of a good, but he neither receives nor pays compensation for that effect. In pursuit of their self-interest, producers and consumers only consider their own private costs and benefits and not account for their third-party effects, hence creating a divergence between private and social costs and benefits. However this paper discusses only negative externalities in production. One example of a negative externality in production is pollution.

Under the assumptions of perfect competition, the Marginal Private Cost curve is the same as the Marginal Social Cost Curve and that the quantity of pollution rises with output; the demand-supply diagram of a negative externality in production reflects this situation.

Diagram.

The free market equilibrium is at Em with output Qe units, since firms equate their MPC to price (MPC=P). Since the production of the good generates negative externalities, otherwise known as Marginal External Cost (MEC), the Marginal Social Costs arising from individual’s consumption of the good (MSB) is higher than Marginal Private Cost (MPC) by amount of the MEC, creating a divergence between MSC and MPC. However, the socially desired output level is Qs units (where MSB=MSC).  From society’s point of view, there is over-consumption of the good by QsQe units, and too many resources are channelled to its production. This is a situation of allocative inefficiency. The money value of benefits from output QsQe =Area QsEsRQe, and the money value of resources from output QsQe =Area QsEsEmQe. Hence the deadweight loss in not producing output QsQe = Area EsREm, showing that there is a market failure.

To correct a negative externality in production, a government such as Singapore’s can help adopt a policy such as using tradable permits. In the case of pollution, the government can use tradable carbon permits. A tradable permit is a government set quota to limit the production of a good that is a negative externality, hence limiting the amount of production of negative externalities by firms. Based on a cap and trade principle, the firms purchase permits to pay for every unit of negative externality they generate, and the cap set by the government is the socially optimal level of production of the good associated. At the same time, firms who find it more incentivising and cheaper to internalise the externality than holding on to the permits, via means such as research and technological development, will do so. This causes the external costs to society, and hence the divergence between the MSC and MPB to fall, as these producers now internalize these externalities. At the same time, they sell their permits to other firms who do not have the ability or willpower to do so. Society as a whole hence produces less of this good, and the market produces the socially optimal output of the good generating negative externalities. Hence the market failure is successfully and fully corrected. Even though the government intervenes, this market based solution does not require excessive monitoring freeing up the government’s resources for other uses. More importantly, it allows the market to use the most efficient and efficient means to abate the amount of good produced, internalising the externalities.

However, using the tradable permits scheme has its disadvantages as well. On one hand, geographical areas which have the presence of firms that can internalise the negative externalities reduce the external costs to third parties. However, this increases or concentrates the externalities in other geographical areas where firms which do not find it cheap to internalise them but produce more via purchasing more permits. This is counter-intuitive to the aims of the policy, which is to reduce or eliminate the negative externality. Even though society as whole reduces the externality, there is merely a redistribution of the externalities between those who can and cannot afford to reduce it, which could be inequitable.

At the same time, the government can introduce an indirect (Pigouvian) tax on producers to reduce the negative externality, equal to the marginal external costs to third-parties. This is shown in the diagram below.

Diagram.

Using this tax causes the producers and consumers to internalise the costs as well, because it is a market-based solution. Such a tax allows markets to continue operating along market forces to a large extent. Although prices have been inflated by taxes, consumption and production decisions are made while firms and household pursue their own self-interest. Apart from taxes providing revenue for governments to finance social and community development projects, most importantly, society as a whole reduces the externality by internalising its costs without concentrating it or reducing it only in specific geographical areas, unlike tradable permits.

Conclusions

In conclusion, governments like the Singapore government can not only use tradable permits, but also other policies such as taxation to reduce negative externalities. This is because each of these policies has their distinct advantages and disadvantages. Despite its disadvantages, I believe that governments should employ the tradable permits scheme. In a technologically-advanced country like Singapore, a majority of firms can readily seek solutions to internalise the externality, since they have the advantage of technology and financial power. At the same time, taxes might not be so effective, especially if the demand for that good or service is price inelastic. This is because a very high tax has to be imposed before any effect on production or consumption can be achieved. This also reduces the government’s popularity, as people view the government as trying to gain from the people, what more if a high tax is imposed. Despite being effective, the government’s vote pool might be reduced, which is not what it wants –maximise votes from the people. Hence, a regime of tradable permits is more effective to implement in countries like Singapore.

JC Economics Essays: Tutor's Comments - This is the second part to an Economics answer based on an actual "A" level Economics examination, but amended to fit this post to demonstrate the answering technique and approach. This Economics essay is about tradeable permits, a very hot topic - and one major suggestion that I would give is that students should find out about Ronald Coase, and his paper on Social Cost (where he came up with what is eponymously known today as Coase Theorem or Coase's Theorem). By the way, whilst Coase might seem to have nothing to do with this paper in the eyes of some new Economics students, because they might not have taught this in schools, the inclusion of his ideas into this paper would be a very good idea because Coase's ideas fit into this whole approach of tradeable permits, with the ideas of transaction costs, trading and bargaining, and internalisation of externalities. In fact, it can be argued that tradeable permits are an application of Coase's ideas. Those are relevant Economics materials that can be included into this paper. Having said that, this is a well written answer that is to the point and analyses the diagrams (they were drawn in the actual answer); yet, my usual tutor's question applies: how would you improve this Economics answer? Thanks for reading and cheers. 

Discuss the advantages and disadvantages of Electronic Road Pricing in the United Kingdom. [25]

Discuss the advantages and disadvantages of Electronic Road Pricing in the United Kingdom. [25]

Tutor's Note: My site will start having more and more Economics materials and interesting Economics topics from around the world, rather than just purely having material from Singapore or from pure Economic theory only. See here, as an illustration, for an example of an Economics essay on China's economy on JC Economics Essays. 

Introduction

This paper discusses the economic advantages and disadvantages of Electronic Road Pricing (ERP) in the United Kingdom (the UK). First, a few definitions are in order: what is ERP? ERP is the idea of congestion charges, where a charge is imposed on cars that drive within a restricted zone during certain times of the day. This paper discusses the economic advantages and disadvantages of ERP in the United Kingdom’s context.

Advantages of Electronic Road Pricing in the UK

First, ERP raises revenue for the UK government effectively, because the demand for road trips is relatively inelastic, especially during peak hours during the day. According to economic theory, relatively inelastic demand suggests that when prices are raised, revenue will increase, ceteris paribus. If the UK government gets more tax revenue, other taxes can be decreased, the government can spend more on public transport, or the budget deficit in the UK can be reduced. Hence, this method of raising revenue can be considered a major advantage.

Second, ERP can increase social efficiency. In a free market, the consumption of car trips is heavily over-consumed. This is because when people are driving, they ignore the negative externalities of congestion and pollution, and only consider their own marginal private costs and benefits. Externalities are third party spill-over effects, and can be negative or positive. In the case of cars, they produce many negative externalities to other people who are not involved in the use of private cars. The marginal social cost of driving is thus much greater than the marginal private cost of driving. 

In fact, empirically, congestion costs the UK economy billions every single year in lost output and wasted time. Pollution from cars is also a significant contributor to carbon dioxide emissions in the UK. Road charging should encourage people to look for other forms of transport which do not pollute as much. Therefore it makes sense for the government to charge a much higher price of driving in congested areas because this will make drivers internalise the externality.

Disadvantages of Electronic Road Pricing in the UK

On the other hand, there are of course certain disadvantages of ERP in the UK. First, it seems to be an intrusion on liberty. To drive one will need countless documents or be monitored by technology. The driver’s movements on the roads and whereabouts might be tracked, which could affect his freedom.

However, this point does not seem rather strong because most times when consumers use electricity or Internet access, their movements and usage are tracked as well, and hence this cannot be considered an infringement of liberty.

Secondly, the government seems to be just using ERP to raise money, which may not be politically acceptable. There could be the perception that this idea does not tackle negative externalities, but is instead a new method of raising revenue from the people.

However, that is indeed one of the reasons for the existence of income tax, Value Added Tax, and every other type of tax. Raising money from a new tax enables other taxes to be lowered or spending to be increased, and therefore this need not necessarily be negative.

Thirdly, ERP increases inequality in the UK. This is true to an extent. This is because a road pricing charge is a higher percentage of a tax for those with low incomes, relative to those with higher incomes, and as such impacts the poor more than the rich who can easily afford to drive, even with congestion charges.

However, buying a car and paying for petrol also affects inequality in the UK. If concern about the equality of income distribution is an issue, the government can alter other taxes and benefits, by taxing differently and redistributing the proceeds. A tax which increases efficiency – in this case solving the market failure of negative externalities – need not be stopped on equity grounds. It is always possible to compensate the effects to others by different redistributions of income, which is outside this paper’s arguments.

Conclusions

In conclusion, ERP clearly has both advantages and disadvantages for the UK government. First, ERP raises revenue for the UK government effectively, because the demand for road trips is relatively inelastic, especially during peak hours during the day. Second, ERP can increase social efficiency and force drivers to internalise their externalities, thus solving a market failure. On the other hand, there are of course certain disadvantages of ERP in the UK. First, it seems to be an intrusion on liberty. Secondly, there could be the perception that this idea does not tackle negative externalities, but is instead a new method of raising revenue from the people. Thirdly, ERP increases inequality in the UK by impacting the poor more than the rich.

In the final analysis, however, given that the core economic issue here seems to be the market failure of negative externalities affecting the socially efficient level of output, then ERP is indeed a good method of solving a particular market failure in the UK, and all other considerations seem to be secondary rather than primary to the core issue. 

JC Economics Essays: Tutor's Commentary - As promised, this site offers more than just topics of interest to Singapore, but also other countries and international events, situations, and much more material. Hopefully this will help you in your Economics revision, and at any rate you can get to learn more about other countries and their economies, or their economic situation, and see how general Economics concepts can be applied to different countries' contexts, and the international context as well. Observe that from a student's viewpoint (as well as an Economics tutor's viewpoint), solving congestion utilises general economic principles that apply not just to Singapore, but to other countries' contexts as well. In other words, always think of how you can APPLY Economics to DIFFERENT contexts, topics, and subjects. As usual, the usual tutor's comments apply: think of what the relevant diagrams should be; how would you improve on this answer, and how can you approach this Economics question other than using this approach? Thanks for reading, and cheers! (Acknowledgement: This Economics essay was written by a student who worked with me.) 

"Education is a Merit Good; The Government Should Pay for Education." Discuss. [25] (Rephrased Economics Question)

“Since education is a merit good, the government should pay for the people’s education up to, and including, tertiary education, such that education is free”. Discuss.  [25]

A merit good can be defined as a good that society deems desirable, or a good that has positive externalities to society. Education is definitely a merit good given that it is desirable to society, and certainly it seems to confer positive externalities to society as educated people are generally more cultured, logical, and reasonable, and are thus less likely to contribute to crime and social disorder. This paper discusses the issue that, since education is a merit good, the government should pay for education up to and including tertiary (university) education. While it is true that education is indeed a merit good and the first part of the statement is definitely true, it does not follow that the government should do more than merely subsidise education. In fact, governments should only provide or pay for public goods which are not produced by the free market, and since education is not a public good it should not be provided free.

Education as merit good – and the government should subsidise merit goods

It can be argued that a good that has positive externalities to society can be considered a merit good. An externality is a third party spill-over effect, or an effect that affects third parties not involved in the production and consumption of the good in question, and can be negative or positive. Positive externalities are positive third party spill-over effects. As people do not consider the positive externalities to society, but rather consider private benefits and private costs, they under-consume merit goods. The government can subsidise merit goods in order to boost their consumption, which is good for society.

Alternatively, a merit good can be thought of in terms of imperfect information – people do not have perfect information about the nature of the good, and thus they misjudge its merits and demerits. Hence, this leads also to the under-consumption of merit goods. The government by providing education at low cost (or even providing education free) can be seen as trying to mitigate this informational failure.

According to the diagram below, there is a divergence caused by the externality between the marginal social benefit (MSB) and the marginal private benefit (MPB), assuming that marginal social cost equals marginal private cost (MSC = MPC). Hence, clearly the government should directly subsidise merit goods, which would shift the MPB to the MSB. In this case, a subsidy here is a government payment directly to the consumer of education, which would shift the demand curve to the right. The famous economist Milton Friedman once suggested that an education voucher could be given to students, which would have the effect of shifting the MPB to the right to eliminate the externality. If, on the other hand, an indirect subsidy was given, meaning a subsidy was given to the producer of education, then the MSC curve would shift to the right.

Economics diagram - what diagram should be drawn here?

The Government Should Not Pay Entirely for Merit Goods

On the other hand, the government should not pay entirely for merit goods. Governments should pay for public goods which are non-rivalrous and non-excludable because public goods cannot be produced by the free market without government intervention, whereas merit goods can be produced by the free market. Non-rivalry is the condition that consumption of a good by one person does not reduce the amount of that same good for another person. Non-excludable is the condition that a consumer cannot be excluded from consuming a good. These two conditions lead to the situation where a free market does not produce public goods because of the free-rider problem and because the allocative efficient outcome leads to marginal cost being zero (MC = 0).

There are also other major issues on having free education, other than the fact that education is not a public good. First, there is the issue of opportunity cost. Opportunity cost is the cost of the next best alternative forgone. The problem is that if resources are devoted to making education free, then there are alternative uses for those resources that are forgone, such as national defence, healthcare, and infrastructural investments. Hence, subsidising education would make more economic sense rather than providing it entirely free. Second, the government is not the only possible provider of education – private agencies or public-private-partnerships (PPP) can also provide education. For instance, in many countries around the world, there are private agencies that provide education for profit.

Conclusions

In conclusion, while the government could possibly provide merit goods, such as education, for free in order to solve the market failure of positive externalities not being taken into account by individuals, and to overcome the informational failures associated with merit goods because people misperceive their benefits, there are other issues that need to be seriously considered like opportunity cost and alternative financing methods such as private provision with some government intervention and public-private-partnerships. However, in my opinion, the most important reason why governments should not provide merit goods is that they are not public goods which are not provided by the free market, and as such market-based policies should be used to encourage a higher consumption of education rather than direct government provision of education.

JC Economics Essays – Tutor's Commentary: This Economics paper was written under examination conditions by one of my former economics students, GSW. Putting yourself into your Economics tutor’s shoes, how would your Economics tutor make this essay even better? Hint: Any good Economics tutor would suggest using properly-labelled diagrams, with the curves moving to demonstrate a point, to make a good economics argument. Having said that, this economics site does not feature diagrams - so what else can be improved on, other than the usual "draw a diagram"? In fact, this economics essay is rather well written, and an excellent example of how a hardworking student from a humble background can learn and improve in his studies! This is a economics good paper. Yet, there are other approaches. How would YOU approach this question? Would you go for a more direct approach, or a more indirect approach, compared to this Economics answer? While I would not have answered this Economics question in this particular way, this approach is still workable and can be utilised to get a good grade in Economics examinations. Thank you for reading, and cheers. 

Evaluate the policies used by the Singapore government to correct imperfect information and the lack of mobility of the FOP? [15]

Evaluate the policies used by the Singapore government to correct these causes (imperfect information and lack of mobility of the factors of production/ resources) of market failure. [15]

Tutor's Quick Note: This is a continuation, part (b), of the previous question on this economics site.

There are many policies that the Singapore government can implement to correct market failure due to imperfect information and due to immobility of resources. This paper evaluates the Singapore government’s policies in correcting imperfect information and lack of resource mobility, and the evaluation here is whether these policies solve the underlying cause, causing the market failure, directly.

First, we examine subsidies for merit goods like subsidized healthcare, to compensate for consumers’ undervaluation of them and suppliers’ underproduction of them. Secondly, we also examine state intervention in the form of taxes to solve negative externalities. These two examinations address positive and negative externalities which are unknown or unconsidered by private consumers and producers and thus cause market failure.

Insert Economics diagram. Think: which diagram is relevant here? How would you explain it?

The economic answer is clear: increasing subsidies solves the problem of positive externalities being unacknowledged, while increasing taxes solves negative externalities. For instance, there are portions of the budget set aside for subsidized healthcare for senior citizens. Provision of food stamps and rations for low-income families, a wide umbrella of social services to provide free counseling for problem cases such as troubled teenagers, marital and family problems, and other services which private markets tend to fail in. These subsidies cost money, and perhaps that might be a problem, due to opportunity cost, which is the cost of the next best alternatives foregone. Yet, it is still possible to argue that using a cost benefit analysis the costs of the subsidies are worth it.

Furthermore, smoking, which is a demerit good, which has negative externalities, is heavily taxed in Singapore. These show that the Singapore government has done the right thing by removing distortions caused by people not taking externalities into account. The underlying causes indeed were taken into account.

Secondly, there can be the direct provision of information, for instance, with respect to smoking as well as insurance and unit trusts. The public often over-value demerit goods like cigarettes and tobacco, causing market failure as consumers overestimate the marginal benefits of it. The government thus runs a full series of anti-smoking campaigns trying to educate consumers such that they make informed decisions and are fully aware of health consequences in purchasing cigarettes. This does not fully correct market failure but mitigates it. Regarding cost-benefit analysis, this is viable due to the low costs of mass media campaigns but sustainable benefits of consumer knowledge. In Singapore, there is the Financial Advisers Act, under which independent advisory firms act as intermediaries between agents (insurance companies) and principals (consumers), acting to inform and educate consumers fully about insurance products from all insurance firms and providing proper product recommendation. This policy can correct market failure in the long run as many consumers are reliant on private insurance providers. However, it has its sustainable benefits as independent advisory advisers earn their remuneration from the portfolio growth of their clients, thus aligning their interests. Lack of information thus necessitates more information. Therefore, possibly the underlying causes were taken into account.

In Singapore, the most immobile form of capital is labour, which the government has targeted constantly. Capital flows are all flexible in Singapore, as from the beginning we have had a focus on external MNCs and foreign direct investment. We focus here on labour. Has the government done a good job here?

The government can solve the problem of immobility of factors of production: first, job matching and training schemes to link up supply and demand forces in the labour market. Colleges have job centers to facilitate the process in which graduates get their credentials matched to suitable jobs. Similar job matching centers under the National Trades Union Centre (NTUC) are widely available, all measures to improve structural rigidities, to reduce time-lags in factors of employment is responding to market demands. Perhaps the only criticism might be in terms of costs of training and opportunity costs. The underlying economic causes were taken into account. Increasing information and increasing training solve frictional unemployment and structural unemployment and hence reduce immobility of labour greatly.

Regarding trade union pressures, all agents representing workers’ benefits come under the NTUC, which tries to incorporate employee and firm interests, aligning them to national interests. Politicking at workplaces and lobbying are actively stopped by the Singapore government. This is a measure that only works for Singapore, in which political power is centralized and the state can intervene. Singapore’s uniqueness works in its favour here.

However, for other countries with many federal states, lobbying and union pressure is still abundant, which proactively try to manipulate prices and market systems for their own interests. Hence it might be only possible for Singapore to use the internationally famous tripartite method of solving immobility of labour.

In conclusion, Singapore has many heavy duty weapons in its arsenal for reducing imperfect information and immobility of labour. However, any policy used must be checked for its effectiveness in solving the underlying problems that cause the market failure.

JC ECONOMICS ESSAYS Tutor's Comments: This was written by a former Economics student of mine (from MJC) under examination conditions. I would not have approached this economics question this way; however this quite skilfully written economics paper is very good and very clear. Do, however, ask yourself a few questions. How would you have written it, to address the question? How would you have improved on it? There are many other ways to approach this question that would have also adequately addressed its specialised requirements. Do remember to think of how you can learn from this Economics essay. Thank you for reading and cheers. 

(b) Evaluate the possible policies a government might adopt to deal with the above market failure.

The first part of the question: (a) Explain why pollution and congestion caused by cars may cause market failure. [10]

(b) Evaluate the possible policies a government might adopt to deal with the above market failure. [15]

(in this case, externalities, as can be seen in the part (a) answer above) (15)

There are many policies that a government can utilize to overcome externalities in terms of congestion and pollution. This paper suggests policies and highlights their pros and cons. The government can impose congestion charges, such as the Electronic Road Pricing in Singapore (ERP), impose quotas or taxes to control the vehicle population, such as Certificates of Entitlement in Singapore (COE), improve the public transport system, build more roads, and other miscellaneous policies. All these will be explained and then evaluated in this paper.

First, would congestion charges work? They might work as the government is forcing drivers to internalize the externality. In this case, drivers will internalize the negative externality. What does this mean? Internalizing externalities means that the drivers are forced, by the use of the congestion charge, to factor this additional cost into their calculations, hence reducing the number of trips they take and raising the private cost of driving to the drivers. This suggests that congestion charges are an excellent government policy that would have a high chance of working precisely because they makes drivers consider social costs as private costs.

Insert economics diagram. What diagram goes here?

The diagram above demonstrates the core idea of congestion charges, which is to shift q1 to q2 and p1 to p2, which shifts the private cost curve to the social cost curve.

Yet, the problem is that the government may further distort the market instead of getting a desired outcome because of imperfect information. The government may want to know but it cannot. There is no way for the government to know exactly what and where the socially optimum level of driving is because in reality, such data is impossible to find. How much congestion charge should the government charge?

In addition, the government might find it hard to adjust congestion charges because of political reasons. Should the congestion charge be high, possibly solving congestion and pollution, but endangering political success at elections; or should the congestion charge be low, possibly not solving congestion and pollution, but being more acceptable? It seems that theoretically congestion charges tackle the core issue of the overconsumption of car journeys by making drivers internalize the externality, but in practice there are many unaddressed and difficult issues.

Controlling the population of vehicles is another possible solution, where governments target the supply of cars and not the demand for cars. The Singapore government, for instance, uses COEs to control the supply of cars, as whoever wants to drive needs this licence to own a car. The total number of cars can be thus controlled with this kind of quota, which limits the total number to a cap. In comparison with congestion charges, COE does not restrict the use of the car, but reduces car ownership, with the central idea being that there would be less congestion and less pollution with fewer cars around.

Yet controlling the population reduces the total amount of pollution, yet may not reduce congestion. The reason is that congestion depends primarily on usage, which can be thought of as how many cars are out on the road at any given time. During peak hours there would automatically be congestion, even if governments were to reduce the total number of cars. This is because the cars are on the road at the same time. Hence, controlling the vehicle population is a good idea but should be done in conjunction with reducing usage as well.

Improving the public transportation system is yet another solution. This would provide an alternative to using cars as a means of transport, or as we say in economics terms, a substitute. By subsidizing public buses and trains, and making them more affordable and convenient, the use of cars would be lessened, and congestion and pollution would be reduced. For instance, people who would drive will decide to take the bus, and there would be fewer cars on the road.

However, with the exception of trains, buses produce pollution as well, and while reducing congestion would not necessarily reduce pollution if more buses are put on the roads. Also, the cost of improving public transport might be prohibitive, where governments face the opportunity cost of the money forgone for other more pressing uses, and there might also be strong opposition from people who prefer their own cars. All considered, however, improving public transport would still prove to be a good method of reducing congestion and pollution.

Another solution by governments is usually to build more roads, as by building roads, there would be less congestion. However, the issue is that road building does not solve the underlying problem, which is the externality. There would still be many cars on the road, and the decisions made by private individuals would still conflict with the social good. Unlike the other methods discussed earlier, road building does not reduce the usage of cars, and does not reduce car ownership. Hence building roads helps win elections more than it does actually solve congestion or pollution, which are market failures by nature.

Moral suasion and other non economic methods could also be used, but they are short term and still do not address the underlying negative externality. For example, posters and public education are not that effective in reducing overall car usage in Singapore. Therefore, they are also not heavily used in most other countries as well as compared to the methods of reducing car usage and ownership.

In conclusion, a government has many ways of dealing with congestion and pollution, but each policy chosen has pros and cons which must be carefully evaluated. Controlling car usage by the use of congestion charges like ERP make consumers internalize the negative externality because they consider their private costs and not social costs, yet there are political repercussions and informational challenges. Reducing the total number of cars will bring about less congestion and pollution overall but does not solve the problem that car usage is concentrated at certain times. Improving transportation systems would be a good idea if the cost were not too oppressive, as there would be an opportunity cost in terms of other more pressing governmental projects. Building roads and moral suasion might not be sustainable. Therefore, all considered, a mixture of various policies should be used rather than a one size fits all policy that pretends to be a panacea but is not.

JC ECONOMICS ESSAYS Tutor's Comments: This Economics essay is very well written and addresses the question fully. How and why? Think about it. How would you improve this essay, or how could you approach this question slightly differently or alternatively? This Economics paper was also professionally written, jointly with part (a).

What is Development Economics?

This is how another person attempted the question and analysed the issue of What is Development Economics?

Development economics can be seen as a branch of economics that deals largely with the economics of low income countries and their process of development. It is concerned with the “efficient allocation of scarce productive resources” and the “economic, social, political and institutional mechanisms… to bring about rapid and large scale improvements in the levels of living.” Development not only refers to an increase in gross national income, but includes other relatively less quantifiable variables such as improvements in healthcare, workplace, human rights and other measure of the standard of living.

However, development economics is not the mere extension of traditional economic analysis towards developmental issues. It differs from traditional economics in terms of methodology and assumptions.

In terms of methodology, Hirschman highlights that development economics is defined by the “rejection of the monoeconomics claim and the assertion of the mutual benefit claim”. As such, development economics opposes the view that there is only one kind of economics that can be universally applied. This implies that developing counties differ from developed countries in a few crucial characteristics that would require separate theories. Another tenet of development economics is that trade between developed and developing countries is mutually beneficial and the former can aid in the development of the latter.

In terms of assumptions, a key difference is that development economics also incorporates social and political institutions into its economic analyses by presuming a number of market failures that would result in a misallocation of resources. It is a policy science with a larger role for the government to play in order for economic development to occur, for instance in jumpstarting industrialization, as opposed to what classical economic theory would prescribe.

The existence and utilities of development economics can be justified most strongly by the argument that developing and developed countries have distinct characteristics that need to be accounted for differently in theory. For instance, developing countries were characterized by widespread rural unemployment, leading them to be stuck in a poverty trap, with low equilibrium levels, and late industrialization, which required a deliberate, intensive, guided effort. Early development economics also argued that more state intervention was required in developing countries because their markets fail more dramatically and frequently. Such differences in developing countries would require different economic analyses and policy prescriptions from that of developed countries.

In addition, development economics would allow us to focus on the diversities between developing and developed countries. Within the monoeconomic framework of traditional neoclassical economics, we would focus only on common factors which we have indentified in developed countries while examining developing countries. Rostow’s economic stage of growth outlines five stages of economic growth which are common to all countries. Conversely, Gershenkorn observed that factors which were seen as prerequisites of growth in developed countries were almost non-present at all in developing countries and proposed an alternative view of industrialization with an emphasis on the role of institutions.

Hence, development economics aids us in explaining reality better. The purpose of theory is to simplify the complex linkages of reality into a sequence of causality which the human mind can comprehend. Traditional neoclassical economics, with its’ ceteris paribus assumptions and assumptions on rationality amongst other assumptions, suffices as a broad theory which can be applied to a variety of markets and situations if these assumptions hold. Yet it is precisely this which oversimplifies reality. The utility of development economics lies in it allowing us to separate developing countries and observing their characteristics within a framework that draws our attention to the multidimensional view of development.

Moreover, development economics fulfilled a historical function in placing economic development on the agenda of policy makers. The differences from developed countries encouraged a greater role for the government to play in developing countries. Through its’ mutual benefit claim, development economics also encouraged aid from developed countries to developing countries.

Despite the utility of development economics, it faced a decline in the 1970s and 1980s. Even with government intervention, developing countries were not developing as they should, nor was convergence achieved. This led to critiques on development economics. Neo-Marxists condemned developmental policies as the exploitation of developing countries which led to polarization effects and income disparities while neo-Classicals argued that government intervention resulted in too much misallocation. Hirschman suggests two main reasons which were instrumental in forestalling a reply towards these attacks.

Firstly, there was the increasing diversity of developing countries. The theories of development economics were intended for a typical developing country, yet developing countries differ greatly in terms of population composition, availability of natural resources, dependence on agriculture, and social and political institutions. When policy recommendations suggested by development economics were applied, there were varied results in these developing countries, thus undermining the ability of development economics to formulate a unified theory applicable to all developing countries. For example, South East Asia achieved astounding economic growth and increases in national income but this was not replicated to the same extent in Latin America or Africa, which remained poor. This pushed development economics towards formulating a universal set of policy goals such as the Washington Consensus which could be applied to all countries.

Secondly, development economics had presumed that increasing national income would naturally solve social and political problems. Instead, it appeared to be followed by “development disasters” such as “civil wars” and “murderous authoritarian regimes” in developing countries. Economic development was driven not only by economics but by political forces as well, resulting in the inability of pure economic analysis to provide solutions to developmental issues. In addition, these government failures were seen to be more severe than the market failures, leaving development economists disillusioned. This had an opposite effect on development economics and it turned towards specialized technical tasks and focused on issues such as basic needs for the very poor countries instead of overall developmental strategies.

However, development economics still remains relevant and valid today. Development economics can make methodological improvements to incorporate the observed diversities among developing countries. Shin suggests that development economics should move towards the path of hetero-economics by focusing on a few countries and developing a combination of theories to highlight and explain the impact of these diversities. In doing so, the explanatory power of development economics can be further improved. Thus, the diversity which Hirschman saw as fatal for development economics need not be a limit on the potential of development economics.

In addition, while development economics may not be able to account for all the diversity among developing countries, neoclassical economics does not fare much better when applied towards developing countries. According to Chang, the implementation of neoclassical policies has also led to “growing inequality, intensified social tension… and other ‘social problems’”. In contrast, the growth of China and India may also suggest that government intervention may have a more important role in economic development than what neoclassical economics prescribes. The persistent failures of the application of neoclassical economics indicate that development economics, with its emphasis on characteristics of developing countries, may provide more relevant policy implications.

Development economics provides a better approximation to reality. Shin acknowledges this, but concedes that universal theories remain dominant due to lack of a unified methodological structure of development economics. He lays out a possible methodology for development economics to deal with diversity in causality. General theories based on universal factors are to be further refined to take into account of the economies to form second-stage theories. While this reduces the overall applicability of the resultant theory, what we gain in terms of a better approximation of reality and a better understanding of causality would compensate for this loss of generality.

As such, one would disagree with Hirschman’s views on the decline of development economics. Time has shown us that neoclassical economics is not necessarily more effective than development economics in averting developmental disasters or promoting economic development. The diversities that have once torn development economics apart can be reworked and re-incorporated into a hetero-economics framework. This sets out an alternative direction for development economics to move along in the future and should re-establish faith in development economists that the subject is still relevant and useful.

JC ECONOMICS ESSAYS: Special thanks to Y YL.

What is development economics?

Development economics is a distinct extension of traditional neoclassical economics and political economy that highlights an expanded and more determining role of the government in economic development. Although similarly concerned with achieving a steady growth of aggregate output over time, whilst ensuring an efficient allocation of scarce resources, development economics’ unique approach to the study of economic development makes it a synergy that is worth more than the sum of its parts. Uniquely, development economics focuses on not only on the economics, but also the social and institutional mechanisms required to enable rapid and large-scale improvements in the standards of living of the poor in developing nations. It goes beyond the traditional economics primary concern with the efficient, least-cost allocation of scarce productive resources and the long-term rise in capacity of such resources to supply increasingly diverse economic goods and services. It also covers the political economy domain that mainly studies the social and institutional processes through which power relations affect economic decision making in resource allocation.

This distinct approach stems from development economics’ standpoint that the unique characteristics of developing countries, such as rural underemployment and late industrialisation, warrant a special branch of economics that caters to the study of developing countries, instead of merely applying a universal orthodox economics. Unlike the neoclassical view that is premised upon the presumed universal efficiency of the free market in bringing about economic growth in any country, whether developed or developing, development economics rejects precisely what Hirschman terms the “mono-economics claim”. Instead, it calls for a stronger role of the government, both at the international and national level, in the formulation of appropriate public policies to effect economic, institutional and social change required for development among late developers in the context of local conditions and globalisation. As such, development economics is a policy science.

To warrant the existence of development economics is to justify that it is not just a mere amalgamation of different sub-disciplines in economics, political science, or any other subjects. It is deserving as a separate sub-discipline in its own right as it has unique utilities not found in any other disciplines alone. As aforementioned, it is a special synthesis of various disciplines that is particularly cognizant of the diversity not only between developing and developing countries, a key feature that stimulated its rise. Increasingly, diversity within developing countries is recognised by scholars as important considerations in creating a development economics that systematically accounts for such diversity. This will further enhance development economics’ sophistication as a development policy tool as conscious attempts are made to reconcile its aspirations with reality.

Indeed, historical evidence indicate that countries like China and India that have shown impressive growth had state intervention and planning, as called for by Gerschenkron’s theory of late industrialisation. The role of the state in other East Asian countries with good growth performance is undeniable. Such is the case of Korea’s state-initiated heavy and chemical industry, Taiwan’s high-tech firms attached to the government’s research institute and the Singapore government’s wooing of multinational corporations MNCs into specific sectors. Notably, subtle differences in these government policies that brought about growth indicate development economics is taking the right step in its original call for a hetero-economics stance. An example would be the postulation of the Beijing Consensus as opposed to the Washington Consensus.

Going forward, the convergence in policy mindset in development economics in spite of the split between micro and macro- development economics, which has also led to different methodology in practice , bears well for a more systematic approach that recognises diversity. Such pragmatism calls for the practical application of policy solutions crafted in recognition of the context of the country under study. The notion that there is no one-size-fits-all policy approach to economic development has been extended from the international arena between the developed and developing countries to within developing countries.

With “a billion slum dwellers in the developing world’s cities, a billion people in fragile lagging areas within countries, a billion at the bottom of the global hierarchy of nations”, development remains a challenge.

The existence and utilities of development economics in making is justified as it has delivered positive results and is improving in its methodology with appropriate convergence. Given the open and mixed economies in the world, the question is no longer whether the government intervention is needed but how public policies should be made. An evolving development economics has a central role to play.

According to Hirschman, the attacks from the neoclassical economists and neo-Marxists on the hybrid nature of development economics and, signs of weaknesses of development economics relative to its previous achievements and other growth strategies, contributed to the decline of development economics. Unsurprisingly, the neoclassical economists launched a coordinated and channeled attack on the main flaw of development economics – the misallocation of resources – which would not have been as detrimental had the free market been allowed to operate without government intervention. The neo-Marxists accused the development economists of the lack of analytical rigour in promoting a fundamental change in socioeconomic structure in developing countries and relationships with the developed countries, such that a new form of dependency results.

As such, some advocates of industrialisation became the harshest critics of development economics. Moreover, the decreasing returns of policies that had promoted industrialisation in the 1960s, albeit at the cost of inflationary and balance-of-payments pressures, gave less credence to the utility of development economics. The development disasters that coincided with the rise of development economics had been used to defile efforts at industrialisation. Export-oriented policies gained attractiveness following the successes of countries like South Korea and Taiwan and as world trade increased rapidly.

In addition, development economics’ initial unified approach to analysis and policy recommendations for all underdeveloped countries, which led to its rise, ironically became a source of its downfall as the premise of the typical underdeveloped country became increasingly unreal. Such a premise did not realistically take into account the diversity of developing countries that intensified as development proceeded at different rates and took different forms in Latin America, Asia and Africa.

However, the fatal blow dealt to development economics was its inability to promptly tap on the opportunity to re-synthesise decisive arguments against the incrimination of intellectual responsibility for developmental disasters in the developing countries in the 1960s and bolster the structure of development economics. The development disasters and its association with appalling civil wars, authoritarian regimes, failure of benefits to follow economic growth in social, political and cultural arenas, had a decisively disabling impact on the discipline’s self-confidence, much more than the neoclassical and neo-Marxist theoretical attacks.

Subsequently, the decline of development economics followed. Some practitioners narrowed the scope of their sub-discipline, relegating economic development policy to a technical task that is to be undertaken under an implicit Pareto optimality assumption and hope for efficiency improvements without making the society worse off. Others sought refuge in Freudian displacement and attempted to show that the scene was dismal on both the political and economic front. Economic injustice such as increasingly inequitable income distribution in spite of growth sounded the alarms that the narrow definition of development ought to be expanded to include the basic needs of health, food and education. As other experts on these areas are required on the study of development, Hirschman proclaimed what was to him the irrevocable fall of development economics.

JC ECONOMICS ESSAYS Special thanks to M Z for these Economics materials.

(a) Discuss the likely causes of a rise in consumer spending in Singapore [10]

(a) Discuss the likely causes of a rise in consumer spending in Singapore [10]

This paper discusses the likely causes of a rise in consumer spending in Singapore. Consumption refers to the planned spending on consumer goods and consists of both autonomous and induced consumption. There are several factors that can cause a rise in consumer spending in Singapore.

Firstly, induced consumption could be due to national income changes. Singapore may experience high economic growth rates in recent years which led to the growing affluence of Singaporeans. This rise in national income translates into an increase in purchasing power which would mean that households would be able to spend more on consumer goods and services. Eventually, there will be a rise in consumption indicated by a shift of the curve. However, the extent of the rise in consumption depends on the value of the MPC and whether the rise in national income is permanent.

Apart from this, autonomous consumption also increases. This could be done to firstly, consumers expectations. Strong economic forecasts and stability in both internal and external environment would lead to an optimistic outlook on the economy. Therefore, there will be strong consumer confidence as people tend to save less for rainy days and expect future increase in income, leading to a rise in consumption. However, the extent of the rise depends on how optimistic consumers are judging from the outlook and whether this outlook is a temporary or permanent phenomena.

Secondly, consumption increase may be due to government policies or disposable income rise. A fall in income tax rates (which reduces the reliance on direct taxes) and the increase in transfer payments in recent years have led to an increase in the disposable income. Households are likely to down more due to the increase in purchasing power. However, the extent of increase in consumption depends on the propensity to consume and other factors - for example, a rise in GST from 5% to 7%

Lastly, interest rates and credit availability also affect consumption. Lower cost of borrowing and loosening of credit facilities as seen by growing varieties of credit cards available in the market and the aggressive advertising tactics that follow show an encouragement on the bank's part to consume. It is now cheaper and easier to borrow in order to purchase consumer durables and there is a reduced incentive to save due to lower returns, therefore leading to a rise in consumption.

The extent of the rise, however, depends on the interest elasticity of consumption, the economic outlook and availability of past savings.

JC Economics Essays - Economics Tutor's Comment: This response is quite a good attempt at answering the economics question posed, especially during examination conditions. Fair work, and a good effort, given that this was done under "A" level Economics examination conditions. However, there are some possible areas of improvement - putting yourself into the shoes of an Economics tutor or examiner, what would you do to improve this economics paper, other than drawing in the correct Economics diagram and then explaining it carefully? What other economics details should have brought into this paper in order to improve it? Thanks for reading and cheers. Suggested grade: 8/10. 

(a) What are the various sources of market failure? [10]

(a) What are the various sources of market failure? [10]

Market failure is the failure of the free market to allocate goods in an efficient manner. In a free market economy, there are many types of market failure. This economics paper focuses on three main types of market failure, namely: externalities, both positive and negative, public goods, and imperfect competition in the market. This paper argues that market failure or the inefficient allocation of resources occurs when production is not at the socially optimum level.

First, externalities are said to exist when the actions of producers or consumers affect third parties who are offered no compensation for sustaining the loss generated. Externalities can be known as external diseconomies and economies as well as third party spillover effects. They exist because the market cannot deal properly with the side effects of many economic activities. Externalities involve an interdependence on utility and production functions. An external benefit or a positive externality refers to the benefit from production or consumption experienced by people other than the producers or consumers. This occurs when an externality-generating activity raises the production or the utility of the externality-affected party. Hence, the economic activity provides incidental benefits to others for whom they are not specifically intended.

Suggested Market Failure Figure 1: External cost in production

A negative externality or external cost refers to the cost of production or consumption borne by people other than the consumers or producers. The undesirable effects on the allocation of resources by an externality can be explained by the Marginal Social Cost (MSC). The Marginal Social Cost is a sum of the Marginal Private Cost (MPC) and the Marginal External Cost (MEC). MPC is a share of marginal cost caused by an activity that is paid by the people who carry out the activity and MEC is the share borne by others. When the firm’s activities generate negative externalities, its MSC will be greater than MPC. Since, in equilibrium, the market will yield an output at which consumers marginal benefit is equal to a firm’s MPC. Thus, as shown in Figure 1, MPB is less than MPC, hence the costs that is incurred to society outweighs the benefit derived from the good. Consider the soap industry which, in a free market would discharge waste products into the air and into rivers. The owners of soap factories being profit maximisers will only consider their private costs and ignore the wider social costs of their activities. Thus, MSC is more than MPC.

Suggested Market Failure Figure 2: External benefit in consumption.

An example of an activity which generates an external benefit in consumption is vaccination. If an individual makes a decision to be inoculated against a particular disease, then he will receive the private benefit of not being infected by that particular disease. However, there are also other possible benefits to all others with whom he comes into contact as they will not contract the disease from him. The vaccination protects not only the person who is vaccinated but also the entire community that person lives in, by preventing the spread of contagious diseases. Thus, MSB is greater than MPB. The individuals consider only private benefits and costs in their consumption decisions. Hence, they will consume OQ1 units where MPB=MPC. However, the socially efficient output occurs at OQ2, where MSB=MSC. There is thus an underconsumption of Q1Q2 of the good which results in a deadweight loss equal to the area of E2BE1. Insufficient scarce resources are being devoted to the production of this product. The market has failed to allocate resources efficiently.

Secondly, one major source of market failure is the failure of the free market to provide public goods without government intervention. Economic goods can further be subdivided into public and private goods. A public good is one that has two characteristics that private goods do not. Firstly, public goods are non-exclusive. This means that a producer or seller cannot separate nonpayers from benefiting from the good, so that someone who has not paid for the good cannot be prevented from consuming it. As a result, the payer too, eventually does not want to pay, because of the so-called free rider problem. As a consequence, the market will not produce a public good. This is market failure.

Using the concept of externality for public goods, there are no private benefits or revenue for the producer at all but more benefit for the society. Examples of public goods are street lighting, defence and radio broadcasts. The second characteristic is that public goods are non-exhaustible or non-rival. This means that the use of the good by one person does not reduce the quality or the amount available to another. As a result, there is no rivalry in consumption. As a result, there is no additional opportunity cost for the second and third person to use. Assuming that the allocative efficient level is P = MC, and MC = 0, then it stands to reason that P = MC = 0, and the good should be provided free of charge if it is to be produced at the socially optimal level. 

Third, there is the existence of imperfect competition which distorts a free market economy. In a free market economy, there is nothing to prevent the emergence of oligopolies and a monopoly in various industries. An oligopolistic market can be defined as a market structure where there are a few dominant firms which are rivals to each other, each producing either homogeneous or differentiated products, while a monopoly can be defined as one dominant firm producing a highly differentiated good with no close substitutes. The more successful firm (or firms) acquires other firms or puts them out of business. When these imperfect market structures occur, there will be allocative inefficiency because they generate shortages in order to hike up prices and increase profits.

Insert Economics diagram. Either oligopoly or monopoly diagrams. 

Hence, market failure usually results from the presence of externalities, the lack of provision of public goods and the allocative inefficiencies from imperfect competition. Thus there is a role for government intervention in the market to achieve a better outcome in terms of allocation of resources.

JC Economics Essays: Tutor's Comments - This economics response is a well-written and well-crafted Economics essay, that was written under model examination conditions; good work MJ! Special thanks to MJ for her kind contribution. Excellent. NOTE: This economics essay has been edited to make the language flow better but the main points were still written under examination conditions. Thank you for reading and cheers.