As a special economic advisor to the Government, you are tasked with fixing market failures
QUESTION: Your job is to write a solution to one of the #5 market failures below. Consider the advice given and try to target your solution as accurately as possible!
Guiding questions for advisors:
What is the market failure? Briefly explain the issue in your scenario and why the market is failing (e.g., lack of incentives to reduce pollution, unequal access to education, etc.).
What government intervention would address the failure? Choose an appropriate policy or combination of policies (e.g., taxes, subsidies, regulation, public goods provision). Be specific about how the policy would work.
Why will your intervention work? Use economic reasoning (e.g., how taxes on pollution create incentives to reduce emissions, or how subsidies for education can increase access).
What are the potential drawbacks of your intervention? Are there any unintended consequences, costs, or equity issues? How could these be mitigated?
Who benefits and who loses from this intervention? Consider the impact on different groups (e.g., consumers, businesses, government).
These will need spelling out
Explain the market failure clearly and use economic terms.
Design a government intervention that could correct the failure.
Evaluate the intervention’s pros and cons (e.g., potential costs, unintended consequences, effectiveness).
Consider the impact on different stakeholders, such as consumers, producers, the government, and society at large.
Consider a real-world example based upon the Top trump cards and one other scenario you have found online
Market failures in detail
# 1
Negative Externalities: Air Pollution from Factories
Scenario: A large industrial zone on the outskirts of a city has several factories that produce goods like electronics and textiles. These factories emit large amounts of air pollution, which is not reflected in the cost of production. The pollution affects the health of people living nearby, causing respiratory issues, allergies, and an increase in healthcare costs. Local schools have reported higher rates of absenteeism due to illness, and the region has seen an overall decrease in property values.
Your Task: Propose a government intervention that would reduce the level of air pollution and internalize the externality. Consider the use of taxes, regulation, or incentives for cleaner technologies. Discuss the potential impacts on the factories, local residents, and the broader community.
# 2
Positive Externalities: Under-provision of Education in Low-Income Areas
Scenario: In a low-income area of a city, the local school is underfunded, and many children do not have access to quality education. As a result, the school has high dropout rates and poor academic performance. Research shows that children who do not complete their education are more likely to live in poverty, face unemployment, and engage in criminal activities. However, the community benefits when individuals are educated, as they tend to have better job prospects, contribute to the local economy, and live healthier lives.
Your Task: Design a government intervention (e.g., education subsidies, free school meals, funding for after-school programs) to increase access to education in this area. Evaluate the potential costs and benefits of your policy, and discuss its likely impact on the students, the community, and the economy.
# 3
Public Goods: Under-provision of Public Transport
Scenario: A medium-sized city has a limited public transport system that only covers the main areas of the city center, leaving many suburban and rural areas without access to reliable transport. This results in a situation where people who live in these areas cannot easily access jobs, education, or healthcare. Without public transport, many individuals have to rely on private cars, but not everyone can afford to own one, especially those from lower-income households.
Your Task: Propose a government solution to fund and expand the public transport system. You may suggest public-private partnerships, subsidies, or direct government funding. Explain how the intervention can help reduce social inequality, improve access to services, and reduce traffic congestion.
# 4
Monopoly Power: High Prices in the Smartphone Market
Scenario: In the country of Verdonia, a single tech company, TechMonopoly, dominates the smartphone market. It controls over 90% of smartphone sales in the country. Because of its dominance, TechMonopoly has been able to set very high prices for its smartphones, far above what would be expected in a competitive market. This has led to a situation where many lower-income consumers are unable to afford smartphones. Additionally, the lack of competition means that TechMonopoly has little incentive to innovate or improve product quality, as there are no other companies challenging its market share.
Your Task: Propose a government intervention to reduce the monopoly power of TechMonopoly. This might include antitrust laws, breaking up the company, price caps, or encouraging new entrants into the market. Evaluate how your intervention would impact consumers, competitors, and TechMonopoly.
# 5
Information Failure: Misleading Health Claims on Food Packaging
Scenario: A popular food brand, HealthyEats, sells a range of snacks that claim to be “100% natural” and “good for your heart.” However, independent testing has shown that the snacks contain high levels of sugar and artificial additives. Despite the misleading labels, HealthyEats continues to market its products as healthy, and many consumers trust these claims without fully understanding the nutritional content. As a result, many individuals are purchasing these snacks, believing they are making a healthier choice, which contributes to rising levels of obesity and heart disease in the population.
Your Task: Propose a government intervention that would address the issue of misleading food labeling. This could include stronger regulations on labeling, public awareness campaigns, or restrictions on health claims. Evaluate how your intervention would affect consumers, businesses, and public health.
