Economics Questions 2022

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Course ID

ECONOMICS1
Table of Contents
Section A.........................................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................4
Question 3....................................................................................................................................7
Question 4....................................................................................................................................9
Question 5..................................................................................................................................10
Section B........................................................................................................................................12
Question 1..................................................................................................................................12
Question 2..................................................................................................................................14
References......................................................................................................................................17

ECONOMICS2
Section A
Question 1
Introduction
Market failure indicates an economic state characterized by inefficiency of free market in
allocating and distributing goods and services. Under this circumstances as free market fails to
allocate resources efficiently government needs to intervene.
Four tools available to government to correct market failure are as follows
Taxation:
Government can tax an activity that generates negative externality leading to market
failure (Fine 2016). Any proposed tax reduces supply of the good and service resulting in an
increase in price. The higher cost due to tax internalize the externality and correct market failure.
Subsidy:
In case market failure is resulted from positive externality appropriate policy is to provide
a subsidy. The given subsidy encourages production of goods or service with positive externality
and brings back efficiency.
Regulation:
Government can directly implement regulation relating to production, sales or use of
particular goods and services. Regulation is backed legally by fines, imprisonment and other
punishment for violating the rules.

ECONOMICS3
Pollution permit:
Pollution is a common form of negative externality that results in market failure. In order
to address the market failure government issues some permit restricting the amount of pollution.
For the given situation, imposition of tax on the steel plant equivalent to the external cost of steel
production will be appropriate. The sludge produced as a by-product of steel pollute the river
when dumped through the pipe line. The produce however does not consider the external cost of
pollution (Baumol and Blinder 2015). The social marginal cost thus is above the private marginal
cost resulting in overproduction of steel. The imposed tax helps to internalize the external cost
and corrects market failure.
Figure 1: Correction of market failure