Economics - Government Intervention in Market Failure
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- Date Submitted: 09/03/2010 12:05 AM
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Under a lassiez faire system or an economy run by the operation of free market forces, the desired social and economic outcomes are not always achieved. When these outcomes are not achieved, it is known as market failure. Market failure includes severe fluctuations of economic growth (recessions and booms), high inflation, unfair income distribution and monopolies. In response to the insufficiency associated with the various types of market failures, government intervention is required.
Shown on the left is the business cycle determining the economic growth rate of a certain economy. Removing all the factors, the economic growth rate becomes a straight line trend however as external factors cannot be removed completely it becomes a curve with A being a Boom period and B being a Recession period. As shown, there is a severe fluctuation from A to B but with government intervention, A can be reduced to C and B can be increased to D. The government stabilizes the economy whilst sustaining the economic growth rate through the implementation economic stabilisation policies such as monetary and fiscal policies (marcoeconomic policies) and competition and trade policies (microeconomic policies).
The Global Financial Crisis is a recent economic disaster brought upon by the subprime mortgage lending in the US and caused the provision of credit to dry up around the world. Firms slashed their production costs and ran down inventories. The businesses in Australia ran down their stocks by $ 3.4 billion, the largest fall in record. Consumer and business confidence plummeted causing Australia to enter a recession as consumers began to save rather than spend. Without government intervention, Australia’s condition could be on the verge of deflation, which can have negative social/ economic outcomes.
The loose monetary policy or downwards pressure on the interest rate between the Sept/ 2008 to March/2009 period caused interest rates to fall from 7% to 3.25%. Low...
Shown on the left is the business cycle determining the economic growth rate of a certain economy. Removing all the factors, the economic growth rate becomes a straight line trend however as external factors cannot be removed completely it becomes a curve with A being a Boom period and B being a Recession period. As shown, there is a severe fluctuation from A to B but with government intervention, A can be reduced to C and B can be increased to D. The government stabilizes the economy whilst sustaining the economic growth rate through the implementation economic stabilisation policies such as monetary and fiscal policies (marcoeconomic policies) and competition and trade policies (microeconomic policies).
The Global Financial Crisis is a recent economic disaster brought upon by the subprime mortgage lending in the US and caused the provision of credit to dry up around the world. Firms slashed their production costs and ran down inventories. The businesses in Australia ran down their stocks by $ 3.4 billion, the largest fall in record. Consumer and business confidence plummeted causing Australia to enter a recession as consumers began to save rather than spend. Without government intervention, Australia’s condition could be on the verge of deflation, which can have negative social/ economic outcomes.
The loose monetary policy or downwards pressure on the interest rate between the Sept/ 2008 to March/2009 period caused interest rates to fall from 7% to 3.25%. Low...