Examples

Question 1

Failed government intervention

Answer 1

JobKeeper was a government intervention that led to unintended consequences and a decrease in the efficiency of resource allocation. During the Covid pandemic, employers were given subsidies to help pay their employees who could earn up to $1500 every fortnight if they had been working on the job for at least 12 months. This led to some casual workers being less willing to take on additional hours given that they were receiving payments from the government. This led to an increase in idle resources, reducing technical efficiency due to lower productivity. Additionally, some businesses limited their recorded or actual sales to qualify for JobKeeper payments, even when their actual turnover increased. This was not allocatively efficient because the funds could have been given to businesses who genuinely needed the payment or used for other more worthy causes. This was therefore not a socially optimal allocation of resources and lead to a decrease in efficiency of resource allocation.

Question 2

Successful government intervention

Answer 2

Cigarettes
In an unregulated market, there is an over allocation of resource is towards producing/consuming cigarettes (i.e. market failure) due to there be negative externalities (third party costs) not considered in the transaction. In response, the government could intervene by launching an advertising campaign that informs consumers about the harmful effects of cigarettes. This is likely to decrease the demand for cigarettes (D1 shifting to the left to D2), which results in a surplus at the original price of P1, causing producers to lower the price to eliminate the surplus and the new equilibrium price of P2 is reached. Relative prices are the price of one good or service compared to another. The lower price decreases the price of cigarettes compared to other goods, which sends a price signal to producers that there is more profit to be made producing other goods and services. This causes producers to allocate resources away from the production of cigarettes (Q1 to Q2) and towards the production of other goods which have higher profit making opportunities (higher relative price).

Government indirect taxation on cigarettes to deter individuals from purchasing them. This increase in price relative to its counterparts such as vapes this then causes producers to want to start producing cigarettes as there is lots of profit to be made creating a market failure as resources are reallocated to a producing cigarettes which decreases the living standards of all individuals involved