3.

Discuss how the market system might be influenced by

government intervention to provide appropriate quantities of goods
and services. [12]

Entirely free markets, subject only to the forces of demand and

supply and their iherernt effects, bear the risk of market failure. Market
failure manifests as provision of unappropriate quantities of merit,
demerit and public goods and services and can take three distinct
forms: under-provision, where the market fails to provide enough of
one particular good or service; over-provision, where the market
provides an excess of a good or service, often harmful; and nonprovision, where the market fails to provide a good or service at all.
These failures can be seen to originate from the motives of a free
market, that of profit and private ownership, and put at a disadvantage
entire social groups. Hence, for the welfare of society, as well as for the
sustainability of the economy, the government might choose to
interfere using one or more methods of influence.
The simplest method of intervention is by provision. Thus, the
government provides the goods that the market has failed to provide.
For example, it is unlikely that any privately-owned company might be
willing to provide free education or street lighting, simply because it is
extremely hard to generate any profit whatsoever from those activities.
They are, however, essential to the welfare of society and therefore,
the government takes on the burden of providing them. Despite
making goods available, the government is often inefficient in
producing and distributing them. This results in high costs and waste of
resources, which in the long run, might be damaging to an economys
growth.
Another popular method of intervention undertaken by the
government is subsidization, where incentives are payed out to
producers in order that they reduce the prices of their output. Lower
costs have the effect of increasing demand for the subsidized products
and easing the burden of costs for producers, hence setting a section
of the economy in motion. They encourage the production of goods
that have suffered from under-provision, as there are increased
incentives for those that supply them. However, it is this interference
with the market mechanism that might be the most damaging as well.
Where demand and supply have been artificially regulated, the way the
market functions will be altered and this might bear exponential
negative effects to the health of the economy as a whole, in the long
run. Also, raising the money used for subsidization more often than not
falls on the burden of taxpayers, thus reducing their disposable
income, and implicitly, their spending power.

Moreover, the most widely used method of intervention used by

governments, taxation, can be much more flexible than the former
two. Taxes can be used to regulate consumption, demand and threfore,
the supply of different goods. If a particular government wished for
increased use of green energy as opposed to the traditional gas, it
might wish to reduce taxation on green energy and raise that on gas.
Taxation can also be used to promote domestic products, by placing
quotas on imported goods, and to discourage the over-production and
use of goods that are harmful either to people or the environment,
through the use of excise duties. However effective this method might
be in preventing and regulating market failures, it is inevitable that
increased taxation will harm both consumers and producers of certain
goods. This, in turn, might come back to harm economic growth in the
future.
A more extreme option is outright bans on certain goods deemed
very harmful for the government. This will efffectively reduce relevant
output, but will lead to loss of some benefits, such as taxes collected
from the sale of those goods, and increased unemployment. Bans are
particularly difficult to enforce, as the market will look for new ways to
trade the banned goods. In the long run, the enforcement costs might
prove to be too high.
Overall, there is no foolproof way of dealing with market failures.
Government must weigh the benefits and consequences of potential
interventions before taking any economic measures.