penny.sullivan said:
hey anybody who can help would be much help as i am so stuck and have no idea; so heres the question...
Using Australia examples, explain how governments intervene in the free operation of the price mechanism. How can this intervention be justified?
please help anybody!!!
Penny
Look at areas where the price mechanism doesn't work (in other words when market failure occurs). The price mechanism only takes into account the private costs and benefits of those who enter into the exchange (buyers and sellers) but not the social benefits and costs
- merit goods - Merit goods are things that businesses and individuals underestimate the benefits of such as health care and funding for the arts. The free market would not provide an adequete quantity of these things so the government must subsidise them or provide them for free
- public goods - Like merit goods (public schools, defence, roads etc) these don't have a great profit margin so businesses would not supply them, and therefore the government must intervene
- externalities - The government often charges exice on things that have negative externalities to discourage their use (ie smoking).
- the environment - Environmental goods have a lack of property rights (they either dont belong to anyone or belong to everyone), which means that they are often exploited. This can fall under externalities as a lot of environmental damage is externalities
The government also sometimes controls the prices of items using price ceilings and price floors. They will implement price ceilings to protect consumers from exploitation from firms (esp. monopolies) or when the product is a neccesity (ie medicines or water), otherwise the businesses could charge however much they wanted and consumers whould have to pay. Price floors are implemented to protect businesses as it ensure a minimum price for their products
Hope that helps
