Government Intervention And Market Failure: A Case Study On Tackling Obesity (Essay).

Impact of Government Intention to Tackle Obesity

Economics is a broader term, which is related to the choice of the human and also with the utility of the scarce resources. As per the case study, it can be observed that the Government of United Kingdom has imposed taxation on the purchasing of unhealthy foods in order to prevent the yearly loss of 3000 lives through diabetics, stroke, obesity and the other related illness. Therefore, the objective of the study is to tackle the diseases with the help of government intervention. With the help of the production possibility curve, it would be able to identify the appropriate combination of capital goods and consumer goods. On the other hand, this study is helpful to identify the influential factors, which make an impact on the demand and supply of the goods and services. In the next section, this study has highlighted four types of market structures and how it reflect the consumers and the suppliers. Lastly, the effect of externalities would be discussed in this paper.

In terms of obesity, the government of United Kingdom has cleared the intention and it will observe the increasing rates reversed. The strategy of the government is “healthy lives, and healthy people: A call to action on obesity in United Kingdom” (World Health Organization, 2000). As per this strategy, the government of the country would like to develop a new target for reducing the trend in excess weight for the children as well as the adults within the year of 2020. As per the case study, it has come to know that in order to reduce the diseases like obesity, stroke, diabetics, and the government of United Kingdom would like to impose taxation (Ison and Wall 2007, p. 31). This would effectively reduce the purchase of unhealthy foods. This study is benefitted to highlight the effect of government intention in order to control obesity across the country. It is known that market fails when the products are highly consumed by the consumers. If the market fails, then there is a negative effect on the economy. In this connection, it can be stated that Pigou suggested that the government would be motivated for the production of goods and services with the help of positive externalities. This would help of granting subsidies on each unit of the goods by the manufacturer. Therefore, this would help the buyers to increase the satisfaction with the help of tax concession (Dasgupta 2007, p. 99).

Concept of Market Failure

Concept of Market Failure:

As the consumption of unhealthy foods in United Kingdom has been increasing with the passage of time, therefore, the market fails. In case of the allocation of resources, the society has faced several issues and problems. As the resources are scarce, therefore, the society requires to decide about the production of goods. If the society gives priority to the production of more consumers’ products, it would be lower in the future (Nellis and Parker 2006, p. 102). This situation can be explained with the help of production possibility curve, which would be shown in the following figure:

Figure 1: Resource allocation

(Source: Created by author)

With the help of the above figure, the concept of allocation of resources can be discussed. If the economy produces capital goods and consumer goods, then the consumers require to choose the optimum set of the combination of capital and consumer goods. In this context, it is necessary to discuss that the consumers cannot choose at the level of R that is inside production possibility curve. This would in turn reflect the economic inefficiency in term of unemployment of resources.

On the other hand, the consumers cannot also choose the combination of K, which is outside the present production possibilities of the society. In this connection, it can be mentioned that if the consumers choose the combination of B, C or D, then they would get the maximum level of satisfaction. If the consumers plan to have more capital goods, then he will choose the combination of B. With the rise in the necessity of consumer goods, the consumers would choose the combination of D.

As per the case study, it can be mentioned that government of United Kingdom has introduced taxation on the unhealthy foods in order to reduce the purchase of unhealthy foods. This taxation is benefitted to prevent the yearly loss of 3000 lives. In this context, it can be mentioned that the government intervention is necessary, as the market was not accurately allocated. In terms of economics, it can be stated that market failure is a state, where the allocation of food factors across the country are not efficient (Rutherford 2013, p. 458). Therefore, from the above discussion, it can be inferred that the healthy food manufacturing company requires to allocate the foods on the positions, which lies on the production possibility curve.

There are several factors, which affect the demand and supply of products. It is known that the individual demand curve illustrates the price of the goods, which consumers are willing to pay for a particular quantity of goods and services. In this connection, it can be mentioned that if the income statement of the people would increase, then the demand for the normal goods would be increased. After imposing the taxation, the price of the products would be increased and therefore, the demand for the unhealthy foods would be reduced. Therefore, it can be assumed that the diseases like diabetics, stroke, obesity and the related illness. Therefore, the supply would also decrease in order to avoid the extra production cost.

The Factors Affect Demand and Supply of Products

On the contrary, it is argued that if the price of the products would decrease upto a certain level, then most of the consumers would like to purchase the products more from the previous. In this context, it can be mentioned that the supply of the products would be decreased and the supply curve would shift to the left. As a result, the price of the products would be increased. In case of the normal goods, the consumers would feel reluctant to purchase the products after increasing the price of the products. It is known that lower the wage rate, then lower will be the raw materials. With the rise in the number of producers will increase the supply of the products (Scase 2007, p. 630). Moreover, it can be mentioned that lower tax rate would reduce the cost of the products and rise in the governmental subsidies will reduce the cost of goods.

There are four types of markets such as perfect competition, monopoly, monopolistic competition and oligopoly (Bodie 2013) In the perfectly competitive market, there are large number of buyers and sellers. Therefore, it can be mentioned that both the suppliers and the consumers have enough knowledge regarding the products. These reflect on the property rights on the products, which are conferred on the consumers. Nonetheless, it can be argued that no consumers can set the price of the products. Under perfect competition, the firms sell the products where profitability would be generated and where the marginal cost would be equivalent to marginal revenue (Kirzner 2015). 

On the other hand, monopoly type market, there is single supplier in the market. Therefore, it can be mentioned that monopolists earn super normal profit in the long run. In the following figure, the shaded region is marked as the super normal profit under monopoly (Jones and Sufrin 2016).

Figure 2: Super Normal Profit

(Source: Created by author)

In addition, other sellers would not be able to enter into the market under monopoly type market structure. He or she used to sale the products in turn of higher prices. Most importantly, it can be mentioned that there is no substitute goods in the market, so that the consumers would not be able to purchase same products from the other suppliers (Nellis and Parker 2006, p. 210).

Under monopolistic competitive market, the producers sell those products, which are different to each other. In this type of market, the producers mainly focus on the branding or quality of the products (NikaidoH 2015). On the other hand, it can be mentioned that suppliers have the degree of control over the price of the products. In the long run, the monopolistically competitive organizations make zero economic profit (Rutherford 2013, p. 87).

Different Market Structure and the Impact on Consumers and Businesses

An oligopoly is a type of market structure, where only few firms dominate. Under this type of market structure, this would increase a wide range of several outcomes (Sushko 2013). In most of the cases, the firms may employ some specific trade practices such as collusion; market sharing etc. would increase the prices and restriction in the same manner as a monopoly.

An externality is a cost or advantage, which results from the economic activities and influences the third party, who did not choose to incur loss (Koomey and Krause 1997). Therefore, it can be mentioned that externalities may be positive or negative and it is based upon the nature of the effect of the third party. The effect of negative externality can be understood with the help of the effect of pollution. In this study, it can be observed that intake of the unhealthy products would make a negative impact on the consumers and they may suffer from serious ailments. Therefore, the consumers would suffer from the problem of negative externality (Dasgupta 2007, p. 63). Hence, it is necessary the government intervention in order to reduce the consumers’ willingness to purchase the products. Government has imposed taxation on the purchasing of unhealthy products.

In case of the negative externalities, third parties experience negative impact from the activities or from the transaction would not be chosen to involve. In this context, it can be mentioned that in order to reduce the overall profitability, which can repair the damage and reduce the efficiency. On the other hand, positive externalities are benefitted for the third party due to the lower cost. Therefore, it can be mentioned that the collective social welfare would be improved. As a result, lower the good is produced or profitable, from which it is less optimum society and reduces the economic efficiency.

On the other hand, externalities positively make an effect due to the production of goods and it is not efficient when the costs are incurred for damages. Efficiency level would be decreased when the potential money earned would be lost on the non-paying third parties. In case of negative externalities, the producers would try to make increase the acts and behaviors of the producers. In order to reduce the purchase of the unhealthy foods, the government can impose corrective taxes (Imf.org. 2017). This would be also benefitted for the producers to keep the cost lower and also maximize the profitability.

Figure 4: Voluntary exchange

(Source: Dasgupta 2007, p. 500)

The above diagram depicted that the voluntary exchange would be take place within a market. It also reflects that the economic costs are connected with the externalities. On the other hand, it can be stated that voluntary exchange is benefitted for both parties. In this purpose, it can be mentioned that the buyers and the sellers would not be eligible in the trade if the thought it detrimental to themselves. Nevertheless, a transaction can make an additional reflection on the third parties. Negative externalities can be explained with the help of emission of harmful gasesfrom the factory (Ison and Wall 2007, p. 89). The existence of externalities will reflect the outcomes, which are not socially optimal. Those who suffer from the external costs do the involuntarily, whereas those who get external advantage do at no cost.

Conclusion

This study shows several aspects of economics. In this context, it can be mentioned that the demand and supply of products are depending on the type of the goods, whether it is normal goods or giffen goods. On the other hand, it can be observed that on the price level of the goods and the income statement of the consumers, the demand of the goods depends.

After identifying the effect of externalities on the economy, it can be recommended that the government of a country require to impose pigouvian taxation. It would be helpful to reduce the market activities in order to generate the negative externalities. This tax is benefitted to correct the ineffective market outcome. In order to implement pigovian taxation, the government requires to set the outcome equivalent to the social cost of negative externalities.

References

Bodie, Z., 2013. Investments. McGraw-Hill.

Dasgupta, P. 2007. Economics: a very short introduction.. iklim.cob.gov.tr. Available at: https://iklim.cob.gov.tr/iklim/Files/eKutuphane/Economics%20-%20A%20Very%20Short%20Introduction.pdf [Accessed on 5 Apr. 2017].

Jones A. and Sufrin, B., 2016. EU competition law: text, cases, and materials. oxford university Press

Kirzner, I.M., 2015. Competition and entrepreneurship. University of Chicago press

Koomey, J. and Krause, F., 1997. Introduction to environmental externality costs. CRC Handbook on Energy Efficiency

NikaidoH., 2015. Monopolistic Competition and Effective Demand.(PSME-6)

Sloman, J., Wride, A. and Garratt, D. 2012. Economics.. online niseconomics.com. Available at: https://www.niseconomics.com/uploads/1/3/6/8/13688995/economics_by_sloman_welearnfree_-_7th_ed..pdf [Accessed on 5 Apr. 2017].

Sushko, I. ed., 2013. Oligopoly dynamics: Models and tools. Springer Science & Business Media

World Health Organization, 2000. Obesity: preventing and managing the global epidemic (No. 894)