NAME: unregulated economic system in which the invisible

 NAME:                       YASIR KABIR

 

 

 

COURSE:         NCUK/IFY

 

 

 

TOPIC:             Evaluate
the extent to which any government should intervene in the housing market, for
example by using subsidies, or leave the provision of housing to the free
market.

 

 

DATE GIVEN: 

 

 

DATE SUBMITTED:

 

 

 

LECTURERS:    Mr. Lawal and Mr. Adedeji

 

 

 

 

INTRODUCTION

The free market is an
economic system in which prices of goods and services are determined by the
forces of demand and supply without regulations and influence of government. The
issue of government intervention arises when the free market system is not able
to allocate resources efficiently and when the market fails to take into
account externalities which will lead to market failure. Government
intervention is a process in which the government intervenes in markets in
order to address inefficiency or correct market failure. The government may
decide to use taxation or subsidies depending on the type of goods. An example
of market failure is shortage of housing. Shortage occurs when long-term demand
is greater than long-term supply; this can lead to increase in rent, provision
of poor quality housing etc. The main arguments are; should the government
intervene in the housing market or should they leave it to the free market?
Which methods of intervention should the government use? How effective are
these methods?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FREE MARKET

            The free market system is an
unregulated economic system in which the invisible hand determines the prices
of goods and services, in this system the various forms of government
intervention do not exist. This system is said to be beneficial because all
resources are privately owned and members of the society are free to engage in
any type of business. The main problem of this system is that it could lead market
failure. Examples of market failure are:

·        
Under-production of merit goods such as Housing, education, healthcare
which will lead to inefficient/missing markets. 

·        
Inefficient allocation of resources.

 

MARKET
FAILURE

            Market failure is a
situation where the free market is unable to allocate resources efficiently. In
some cases the free market will overproduce or under-produce some goods or it
may fail to produce a good or service. For example; Housing which is a merit
good can be under-produced by the free market, this is a source of market
failure that gives a rationale for government to intervene in the market. 

 

GOVERNMENT
INTERVENTION

            Faced with the problems of the free
market the government intervenes in the free market in order to correct market
failure and achieve equitable distribution of income in the economy. There are
different policy instruments which the government can use. The government can
decide to provide goods and services by itself or decide to persuade producers
and consumers to act differently. The instruments that can be used to achieve
this are; subsidies, taxation, price controls, state provision etc. For
example, the government may decide to intervene in the housing market because
housing is a merit good which is under-produced by the free market.

 

 

 

 

MERIT GOODS

                        Merit goods are goods
whose consumption is intrinsically worthwhile, they are goods that the society
thinks everyone should have irrespective of whether they are wanted by each
individual. Merit goods are considered to be under-supplied by the free market
due to imperfect information and positive externalities. Example of merit goods
include: housing, healthcare, education, sport facilities, museums etc.

 

HOUSING AS A
MERIT GOOD

            Housing is considered as
merit good as it is a good that creates benefit for the community. As a merit
good housing is also under supplied by the free market as a result of imperfect
information whereby consumers of merit goods fail to identify the true benefit
to them and also positive externalities leading to shortage of housing.

 

SHORTAGE OF
HOUSING

            Shortage of housing occurs when the
free market under-supplies housing which could lead to missing markets in
housing. As demand for housing is rising faster than supply of housing, house
prices have increased reducing the affordability of housing. Shortage of
housing is experienced in most counties of the world

According to Chris Vidler and Charles Smith (2008), In
the United Kingdom the long-term demand of housing is growing more quickly than
the long-term supply, it has been estimated that 350,000 new housing units are
required each year if supply is to keep up with demand. This is shown in the
chart below.

Figure 1: A Chart showing Housing Shortage in the UK

(Gotten from; http://www.cherrymortgages.com )

 From the illustration above we can see that shortage of
housing is prevalent in the United Kingdom. Housing shortage is an example of
market failure and has its impacts on the economy.

Effects of
Housing Shortage on the Economy

            In countries like United Kingdom,
Nigeria, Australia etc. housing shortage has been increasing as long-term
demand is more than long-term supply. This has affected the economy in
different ways, these effects are;

·        
Increased Cost of living:

In the United Kingdom shortage of housing has increased the
cost of living of the citizens due to large increase in house rent. Workers in
shops, restaurants etc. are being priced out of living in the capital due to
high rent, only best paid workers are able to afford rent.

 

·        
Inefficiency:

Due to unaffordable housing people travel from long distance
to their workplace, this could lead to inefficiency as some employers might be
tired and late to work. In Nigeria, workers travel for hour’s from their homes
to their workplace due to unaffordable housing.

 

·        
Wealth/Income inequality:

Housing shortage has led to inequality as house owners see a
rise in income and those who do not have houses experience higher costs of
rent. In the UK rise in house prices and the cost of rent have contributed to
the growth in wealth inequality.

 

 

·        
Threatens Economic growth:

In many countries shortage of housing shortage stalls
economic growth because housing shortage can cost communities new jobs and
investment opportunities. In Australia due to a shortfall of 186,000 dwellings,
housing shortage has led to a slump in economic prosperity.

 

Solution to
Housing shortage

 

·        
Government Intervention:

                               
I.           
Subsidy

This is a financial assistance given by the government to a producer to
reduce cost of production and increase output. Since merit goods like housing
create positive externalities, it would be subsidized by the government to
increase the supply of the good. In the UK the government uses two types of
subsidies which are; housing benefits and low-cost government loans. For
example, In the diagram below due to under-provision of housing the government
subsidizes housing which will make the supply curve move from S1 to S2(MPC
?Subsidy) this will make the price to fall from P2 to P1. The decrease in price
will lead to an increase in demand which will make the demand curve to shift from
D1 to D2. The new equilibrium will be where (D1=D2).

 

 

 

 

 

 

 

 

  Price                  D1                               D2                                       S1= MPC

           P2                                                                         
G

           P1                                                      
E                                                    
S2= MPC ? Subsidy

                                                                                            H 

           P3                                                                                                               

                           S1                                                                                                                          
    

                                  S2                                  
                           D1=MPB               D2= MSB                                                                                                                                                                                                                                                               
                                                                                                                                                                                                                                 

            0                                                           Q1              Q2                                                          
Quantity             

Government Intervention Using
Subsidies

                             
II.           
Price Control:

The government
can use rent controls by imposing a maximum price that states how much a
landlord can charge a tenant, this will make rent more affordable and also
protect tenants. It is shown graphically in the diagram below.

Figure 2; A Graph showing
the imposition of rent controls

(Gotten from: http://libertarianjew.blogspot.com.ng )

                           
III.           
Regulations:

The government
can use direct controls to reduce housing shortage by making laws. The
government can decide to ban multiple home ownership ; this will increase the
number of houses available. The government can also decide to give tax breaks
for investors willing to make properties available at affordable rent.

                           
IV.           
Government provision:

The government can
overtake the provision of housing if they feel it will not be provide by the
free market. This can lead to affordability and availability of good housing
since the government would aim at maximizing the welfare of the people.

 

LIMITATION
AND EFFECTIVENESS OF GOVERNMENT INTERVENTION IN THE   FREE MARKET

·        
 Subsidy given to companies
and individuals can be used for other projects instead of housing.

·        
Price control in form of rent control makes Quantity demanded
to be greater than quantity Supplied this can lead to shortage of housing.

·        
Execution of policies by the government may fail due to poor
management and poor method of execution.

·        
Direct production by the government can lead to inefficiency because;
unlike the free market there are no Financial Incentives.

 

Leaving Housing to the Free market

If the government decides
to leave housing to the Free market there will be no financial cost and reward.
This could lead to market failure in which housing would be under-provided
since it is a merit good and has positive externalities i.e. the free market
will not be able to provide for all those who require housing. In the end, the
government might have to intervene in the market eventually and the process of
fixing house rent might be expensive and have adverse effect such as black
market.

 

 

 

 

CONCLUSION

In view of the analysis above, we can conclude that
housing should not be provided by the free market alone  as it can lead to market failure. Since
housing is a merit good it is under-produced by the free market, the best
solution is for the government to encourage production by giving subsidies and
grants. Also, government can impose rent control. This will go a long way to
reduce cost of production and increase the supply of housing.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REFERENCE LIST

·        
Anderton, A. (2008) Economics. Essex: Pearson Education Ltd.

·        
Chu, B. (2014) Britain is suffering from a housing crisis –
who is to blame and how can we fix it?. Available at: http://www.independent.co.uk/property/house-and-home/property/britain-is-suffering-from-a-housing-crisis-who-is-to-blame-and-how-can-we-fix-it-9113329.html. (Accessed on November 3rd,
2017)

·        
Powell, R. (2008) AS Economics. Oxford: Phillip Allan
updates.

·        
Sloman, J. (2004) Essentials of economics. England: Pearson
Education Ltd.

·        
The Australian. (2011) Housing shortage threatens living
standards, economic growth: report. Available at: http://www.theaustralian.com.au/national-affairs/housing-shortage-threatens-living-standards-economic-prosperity-report/news-story/7a5f0c325ce93425ad2eaf6800b1b7d4?sv=ac1d089ba38848f39ccb7644616f331d .( Accessed on November 5th,
2017)

·        
The Guardian. (2016) Britain’s Housing Crisis is so serious
that it must be tackled now. Available at: https://www.theguardian.com/business/2016/nov/20/britains-housing-crisis-must-be-tackled-now. (Accessed on November 4th,
2017)

·        
 Viddler, C and Smith,
C. (2008) The AQA AS Economics. England: Pearson Education Ltd.