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Economics IGCSEPDF 49
118 pagesrevision 46932
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create a market for these spaces and then individuals can be fined for polluting
• International cooperation among governments – governments work together on issues that
affect the future of the environment.
• Political incentives: this occurs when there is a clash between political and economics
(because a government is a political entity with political incentives). For example, even though
mining companies cause a lot of environmental damage, the government may encourage and
promote their activities to garner political and financial support from them.
• Lack of incentives: in the free market, individuals have a profit incentive to innovate and cut
costs, but in the public sector, such an incentive is absent since the government will pay them
salaries regardless of their performance. So, even as the government provides certain public
and merit goods directly to the people at low costs, they tend to be very inefficient.
• Time lags, information failure: these are some of the government failure arising because of a
lack of incentive. Government offices and employees don’t have an incentive to provide timely
services or give accurate information and this leads to very inefficient systems.
• Welfare effects of policies: government policies such as taxation and welfare payments
distort the market. This means that such policies will influence demand and supply in the
economy and cause markets to move away from the efficient points produced by a market
system. For example, high corporate taxes will deter companies from expanding their
operations and making more profits or deter new enterprises from entering the market.
Unemployment benefits given out by the government may cause people to stay unemployed
and receive free benefits instead of working.
PAST-PAPER QUESTIONs
Q.A market system, such as in Spain, has a number of advantages but, despite these benefits,
it can also be said to fail in certain circumstances. This is why governments are sometimes
required to intervene.
- Discuss whether government intervention is always successful in correcting market failure.
[8]
Mark Scheme
(b) Advantages of government intervention:
• indirect taxes to discourage consumption of demerit goods (don't need to use that term)
• subsidies to encourage consumption of merit goods (don't need to use that term)
• taxation to finance expenditure on public goods (don't need to use that term)
• regulations to control private producers, e.g. on pollution and monopolies having market
dominance.
Limitations of government intervention:
• consumption of demerit goods (don't need to use that term) might be discouraged, but unlikely
to end completely given inelastic demand, e.g. for cigarettes and alcohol
• consumption of merit goods (don't need to use that term) might be encouraged, but still a limit
to extent of increase in consumption
• available finance to provide public goods (don't need to use that term) might be