Solutions to Market Failure: Other Solutions (Cambridge (CIE) IGCSE Economics): Revision Note

They are usually provided free at the point of consumption

Accessible to everyone regardless of income

Usually provide both private and external benefits to society

Paid for through general taxation

There is an opportunity cost associated with their provision

Products which are free may result in excess demand and long waiting times

• For example, patients may wait for necessary operations at public hospitals for months or years

Individuals or firms may be fined or imprisoned for breaking the rules

• For example, selling cigarettes to minors is a punishable offence

They help to reduce the external costs of demerit goods

Fines can generate extra government revenue

Enforcing laws requires the government to hire more people to work for the regulatory agencies

Enforcing laws can be difficult as it is a complex process to determine if firms or consumers are breaking the laws

The regulation may create underground (illegal) markets which could generate even higher external costs on society

Increases government revenue in the year the asset is sold

Private firms may run the business more efficiently

The government no longer needs to manage the business or hire people to work for it – this reduces government expenditure

Government assets are often sold well below their actual market value

Private firms often provide a substandard good or service as they cut quality to increase profits

The price of the good or service usually increases as firms seek to maximise their profit

Many privatised companies still maintain considerable market power and have to be regulated, e.g. water companies

Nationalisation can generate efficiencies, especially when delivering utilities (gas, water, electricity) to the national population

It creates more equity in society, as all citizens have the same access to the same resource at the same price

• e.g. Norway nationalised much of the oil industry when oil was first discovered in 1972. The profits belong to the citizens

The business can generate significant revenue for the government

Government firms can often run very inefficiently

There is an opportunity cost associated with the money required to run it

The government may lack the expertise to run the business

Protects scarce natural resources

• Helps ensure long-term sustainability of resources like forests, fish stocks or minerals

Supports environmental goals

• Reduces overexploitation and negative externalities such as pollution or habitat loss

Stabilises markets

• By limiting supply, quotas can prevent oversupply and sharp price falls (especially in agriculture or energy)

Risk of illegal activity

• Strict limits may encourage black markets or unregulated over-extraction

Can raise prices

• Reduced supply may lead to higher prices for consumers, especially if demand is inelastic

Difficult to enforce

• Especially in developing countries or remote areas, monitoring and enforcement can be costly or ineffective