Economics - Australia's Government and relation to the economy

Essay by jackal8High School, 12th gradeA+, April 2006

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Market Failure

Market failure refers to the shortcomings or inadequacies of the market system of economic organisation in achieving allocative efficiency in all circumstances. Market failure can occur in a number of areas of economic activity such as the following:

- The market fails to provide public goods which may be socially valuable but because of a lack of incentive, the private sector fails to provide them in sufficient quantity and quality

- The market distributes income unequally. The distribution of market income is based on the relative marginal productiveness of the factors of production, not according to equity or fairness of the distribution among all sections of the population

- The market system may lead to the emergence of monopoly power in markets where effective competition between firms is weak or absent.

An example of Market failure includes the inadequate provision of some collective goods and services, public goods and merit goods.

Collective goods and services include those demanded by the community as a whole such as defence, education, health and social security. Public goods such as national defence and national parks are said to be non-excludable and non rival. Merit goods are goods and services that the government believes are beneficial to society but they may not be produced in adequate quantities because the market is too small and there is little or no incentive for private production such as opera, libraries and theatre.

Functions of the Australian Government

The broad economic functions of the Australian government are the reallocation of resources and the redistribution of income through taxation and government expenditure; the stabilisation of the economic activity through the use of monetary and fiscal policies; the provision of goods and services through public traded enterprises; and the use of other economic policies such as competition and environmental...