Name : M A Nadiah Bt Abdul Ghani Page 1 out of 3 Principle of Economics 7 : Government Can Sometimes Improve Market Outcome
Many of our decisions, affects not only ourselves, but other people (Mankiw, 2009). That is why, interactions between one another are essential. Even in the market economy, one of the reasons we need government intervention, is to promote efficiency and equality, by influencing the allocation of resources, based on consumers preference. This is because, the “invisible hand” alone, even though powerful, cannot control several situations such as market failures, because it does not possess unlimited power. Therefore with the help of government intervention, it can sometimes improve market outcome.
When looking at promoting efficiency to the economy, market failure is one of the reasons why, the market needs government intervention. According to (Mankiw, 2009) market failures refers to a situation, in which a market, left on its own, fails to allocate resources efficiently. One of the contributing factors of market failures is externality. Externality is defined as the impact of one person’s actions, on a well-being of a bystander (Mankiw, 2009). Externality are divided into two, which are positive and negative externalities. However, negative externalities is the most discussed issue recently.
Negative externalities usually arises when there is an over-production of a product . An example of negative externality is smoking cigarettes. Due to its cheap price, unlimited places to smoke and the availability of purchasing a pack, more and more people tend to smoke up cigarettes. When a person smokes a cigarette, people around them, or secondary smokers, tend to have a high risk of affecting their health, simply by standing beside a smoker and inhaling the cigarette smoke. Cigarette smoke also contributes to air pollution.
Since smoking cigarettes are affecting the society heavily, thus the government intervenes. Over the years, the government stopped the production of a 7 pack cigarettes, they also increase the
Name : M A Nadiah Bt Abdul Ghani Page 2 out of 3
amount of no smoking areas, and they also prohibit the selling of tobacco to under age students. Recently, according to The Ministry of Health Malaysia, they are ready to analyze the proposal of setting the price of a 20 pack cigarettes to a higher price, up to RM 50 (“Harga Rokok”, 2010). This is with the hope of reducing the ability of people to buy and smoke cigarettes, says Datuk Rosnah Abdul Rashid Shirlin, Deputy Minister of Health. The Ministry of Health are also ready to analyze the proposal of fully covering the cigarette pack with Ministry of Health warnings, and only printing the brand of the cigarette at the side of the pack.
As a result of the government intervention towards smoking cigarettes, the market responds by reallocating resources towards a new channel, because the consumers has less demands towards the cigarettes, due to its increasing price, enforced by the government. Thus, negative externalities are reduced, which means there is less market failure. So the market can promote efficiency and improves interactions between one another successfully. Which leads to our 7th Principle of Economics, The Government Can Sometimes Improve Market Outcome.
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Reference List
Harga rokok mungkin RM 50. (2010, January 21st ). Utusan Malaysia. Retrieved 11th March 2010 http://www.utusan.com.my/utusan/info.asp?y=2010&dt=0107&pub=utusan_malaysia…
Mankiw, N. Gregory. (2009). Principle of Microeconomics 5e. Canada : South-Western CENGAGE Learning.
