Allocating Resources: The Market at work and Market Failure

Resources can be used to make goods. Some-for example, timber or water are provided by
nature. Others, such as tools and equipment are manmade.

The table indicates some of the decisions that have to be made in an economy about allocating
resources- that is, deciding how they will be used to produce goods and services.

Decisions involving allocation of resourcesExamples

What resources will be used to produce Type of energy (nuclear, coal, wind, solar)
goods and services to use to power industry and homes
How resources will be used For example, whether energy supplies will
be available for industrial production (e.g.
in factories) or for private use (in homes)
Who decides how the resources will be Whether government owned or private
used business will generate energy.
Who benefits from the use of the resources Whether the energy resources are available
for just a few or for all.

Government influence on economic decision making

In some countries the government plays a major role in decision making. In North Korea, for
example industries are government owned and official working for the government decide
what will be produced, the methods of producing goods and the prices charged. In contrast the
government in most other countries plays a smaller part in this type of decision making.

The market and economic decision making

In a market economy goods and services are freely exchanged and prices are decided by
individual suppliers. Buying and selling decisions are made by buyers and sellers. Prices act as a
guide:
• If prices are high enough, suppliers will be willing to supply to the market. High prices
create profit and increased supply(output)
• If buyers think that prices give good value for money, they will buy goods. The lower the
price, the more the customers will buy.

Supporters of the market economics system argue that it is decentralized and automatic. The
allocation of resources is determined by the wishes of individual consumers and suppliers.

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 Adam smith was one of the earliest
economist and he described the price system
as an invisible hand. His theory was that if
consumers and producers are allowed to
choose what to buy and sell, prices will settle
at a level that benefits individuals and their
community. You can refer to this in a
question asking about market system.

Planned Economic system

In a command economy all decisions regarding allocation of resources, output and price
decisions are made by the public sector that is by the state. Goods and services that are
demanded are not produced in fact those goods are produced which the state things will
improve economic welfare and what is beneficial for the overall wellbeing are given
importance.

A Mixed Economic system

In most countries, decisions are made by a combination of government decision making and the
market. This is a Mixed Economy. Example in a mixed economy like that of Mauritius, most
decisions are made by the market. However, the government does intervene by subsidizing
‘Derocking’ to help farmers increase sugar cane production. In a mixed economic system
decisions are made by private and public sector both that is privately owned enterprises and
the state and the state owned firms makes economic decisions.

What do you mean by economic decisions ?

Economic decisions involve making the best use of limited resources. Consumers, producers
and the government all make economic decisions. Consumers decide where to allocate
resources efficiently to make best use of money to maximize utility; producers make economic
decisions as to which goods to produce that can maximize their profits, whether to be labor or
capital intensive, what is the optimum quantity of labor to hire in a firm. Governments make
economic decisions as to whether to spend more on defense or schools or health care, should
spending on welfare payments be increased or not. All these economic decisions involve best
use of scare resources.

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In a free market economy these decisions are made by the consumers and the private sector
firms, without any government involvement, in a planned economy all these decisions are
made by the government as everything is government owned and controlled. In a planned
economy the consumers cannot signal the producers as to where to allocate resources
according to their demand unlike in a free market economy. However, in a mixed economy
these decisions are made by the government/state and the private sector which will be
discussed in detail later in the notes.

Efficient Resource Allocation

As the aim of a private sector firm is to maximize profits hence resources are allocated to
products that are in demand. Whenever a product is in demand it is said that its market is
profitable or thriving. A market is a place where buyers and sellers interact to exchange and
trade goods and services. Hence when market grows so does the buyers and its sellers. The
prices of the product are the signal and incentive that drives firms to reallocate resources out of
the declining markets into profitable markets.

Market Economic System

The free market means that resource allocation and economic decisions are taken by private
individuals and firms. Everything is owned and operated by private individuals (that is by the
private sector). In a pure free market there would be no government intervention in the
economy. Free market system in which decisions regarding resource allocation, production, and
consumption, and price levels and competition, are made by the collective actions of individuals
or organizations seeking their own advantage. It is an economy where consumers determine
what is produced, resources are allocated through price mechanism and land and capital are
privately owned

Characteristics:

• Private Property

Individuals have the right to own, control and dispose of land, buildings, machinery and other
man-made and natural resources. Owners are also provided with the right to income from
factors of production, owned in the form of rent, wages, interest and profits.

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 • Freedom of Choice

Producers are free to buy and hire any economic resources for the production of goods of their
own choice. Workers are free to enter and leave any occupation for which they are qualified.
Consumers are free to choose the goods and services they want to buy. Consumers can choose
which firms to buy from.

• Self Interest

Consumers and the producers both make economics decisions based on their self-interest. This
means that every decision that will maximize consumer’s utility will be taken by the consumer
in his best interest and similarly whatever maximizes producer’s profit that decision will be
taken by the firm in its best interest. Consumers will spend their incomes on those goods which
yield the maximum satisfaction. Workers will tend to move to those occupations and locations
which offer the highest wages.

• Price Mechanism

It is one of the most important features in the free market economy. Through the price
mechanism, the consumers can inform producers about the goods they want to buy. Producers
who are motivated by large profits will produce the goods that the consumer wants. The price
mechanism works in the following way if the good becomes popular among consumers, the
demand for it would start to rise, which would lead to an increase in the price. This increase in
the price would motivate the producers to make more of the good as price rise due to increase
in demand is an incentive to produce and sell more of that good. However, if the consumers do
not want a particular good, then its price would fall informing the producers not to make that
good thus prices act as a signal telling producers to make or not to make a good. The prices of
the goods are determined through the interaction of the forces of demand and supply. Any rise
in demand would cause the price to rise. So, producers sell the product at the market prices.

• Competition

Producers compete against one another for consumer spending. Workers compete against each
other to get a better job. There is easy entry and exit of firms into and out of any market. This
mean that if anyone wants to start or end a business he/she can easily can. Competition and
choice allows consumers to be sovereign that is consumer sovereignty is another characteristic
of a free market economy.

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 • Absence of Government Involvement

The government plays little or no role in economy. It does not decide what is to be produced,
how it is to be produced and for whom it is to be produced in a free market economy

Advantages of Market Economic System

• Consumer Sovereignty

Consumers have the power to determine what is produced since they are the ultimate
purchasers of the good. When the consumer’s demand for a good is high so the price will rise
and so producers will make more of it. Also due to competition they have a lot of choice
available of goods in the market.

• Quality and choice of goods

Due to competition, consumers have a wide range of goods to choose from and can, therefore,
maximize their material welfare or utility. Firms also try to compete with each other by
providing the highest quality to consumers. They may provide a better service or innovate
themselves or become technologically advanced to provide better quality and service.

• Efficiency

Firms that produce goods using the cheapest method of production are said to be efficient.
Firms in the free market economy try to be efficient in order to make high profits. They are
allocatively efficient that is they allocate resources that are most in demand as well as
productively efficient that is they try to minimize cost to maximize profits. New methods of
production, technology and better machinery can help firms to reduce costs. The profit motive
and competition promotes efficiency also.

• Automatic operation

The price mechanism helps to reduce the need for making decisions through the large
administrative bureaucracy as prices act as a signal telling producers whether they should make
more or less of a good. Time is not wasted on planning and deciding which good should be
produced and also the cost of employing planners is avoided.

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Disadvantages of Market Economic System

The disadvantages or demerit of a market economic system makes a free market economy
undesirable. When we use the word undesirable it means it is socially not beneficial for the
welfare of the people. However, it’s not that this system is completely undesirable but some
disadvantages of it reduces economic welfare.

• Resources will only be utilized if they are required (as firms operate based on self-
interest)

Factors of production if are not required by firms will be made redundant as firms want to
reduce cost and lay off workers who are less productive or are no longer required. This leads to
unemployment and effects the low-income groups hence reducing society’s welfare and
standards

• Private sector firms do not provide public goods

Public goods (such as street lights) are not provided by the free market. This is because it is not
profitable for private sector firms to provide them. Although such goods are demanded by the
public, but no one will pay for a street light to be used for the whole neighborhood as we have
already studied earlier that everyone is acting in his/her self-interest be it consumers or be it
producers.

• Merit goods are under produced below the socially optimum level.

Merit goods are goods that have an external benefit or positive externality. Such as education
or healthcare. These are goods that are beneficial for the society and beneficial for its welfare
and should be easily accessible and consumed by everyone not just the upper class. The
problem is that no one knows the real benefit of consuming them and hence the actual and real
demand for them is not registered in the market and hence producers under provide such
goods and services.

• De-merit goods are over produced or over provided by the free market

De-merit goods (such as cigarettes or alcohol) are those goods that have an external cost or a
negative externality. This means that such goods are harmful for the society and damage the
society’s welfare. But because they are profitable so the free market over produces it or over
provides it. As stated earlier the firms in the free market economy are not considerate about

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the environment or the impacts on the society. If something is profitable then it will be
produced even if it is damaging the environment.

• Monopolies may exploit the consumers

Although free market economy encourages competition between firms there is a possibility
that a firm might dominate the market share and become a monopoly. If it does it may exploit
consumers by charging excessively high prices.

• Firms may harm the environment

Private sector firms may harm the environment through their production activities. E.g. they
may dump chemical waste into rivers instead of recycling them. This is because recycling would
involve a cost and firms want to reduce cost to maximize profits.

• Low income groups may be unable to afford the high prices

Private sector firms may sell products only to those who can afford the price of the product. For
this reason, the low-income groups will be unable to afford the product. The problem is that
this system might seem unfair or unjust but as stated earlier it is operating on the principles of
self-interest.

Planned Economic System

A centrally planned economy is an economic system in which the state or government makes
economic decisions rather than the these being made by the interaction between consumers
and businesses. Unlike a market economy — in which private citizens and business owners
make production decisions — a centrally planned economy controls what is produced and the
distribution and use of resources. State-owned enterprises undertake the production of goods
and services. All firms come under the public sector.

Advantages of Planned Economic System

• The state produces goods which are beneficial and needed for the society to progress in
terms of welfare. It takes the whole community into consideration.
• The prices of essential goods will be kept such that the lower income groups can afford
too.
• Harmful goods will not be produced.
• State monopolies will not exploit consumers

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Disadvantages of Planned Economic System

• It leads to inefficiency that is inefficient allocation of resources. This is because the

government will produce those goods which it thinks is necessary and for the overall
benefit of the society not those goods that are profitable and demanded by consumers;
because consumers can demand harmful and addictive goods too.

Mixed Economic System

In a mixed economy, some resources are owned by the public sector(government) and some
are owned by the private sector.

A mixed economic system is preferred because it overcomes the disadvantages of the market
and planned economic system. This is because the state intervenes to regulate the market
failure and tries to restore the allocative efficiency from the society’s viewpoint.

The intervention of the government to overcome the disadvantages of the free market and the
presence of the private sector to promote efficiency of the business and quality to consumers is
what makes mixed economy a preferred economic system.

DETAILED ANALYSIS (Why most economies prefer mixed economies ? - 8 marks)

A free market economy fails to allocate resources in the most efficient manner by negatively
having an impact on the society’s welfare where the low-income groups suffer. But it is just
how the market system is. It allocates resources based on self-interest.

For instance, in a market economic system the public goods such as street lights are not
provided by the free market. This is because it is not profitable for the private producers to
produce and sell because every individual will not buy a street light and install it outside his
house as this would benefit everyone and as mentioned earlier consumers are selfish because
they are paying a price for it so why would everyone benefit. Hence producers do not provide
them even though they are essential for the economy and society too. But in a mixed economy
the government provides them.

In a free market demerit goods such as cigarettes and alcohol are produced and consumed
beyond the socially optimum levels as producers want to maximize profits and consumers want
to maximize their utility. But in a mixed economy government intervenes by imposing indirect
taxes on such companies so that their cost rises and their production falls. Also, it passes
regulations/laws and imposes fines and penalties who do not comply with government
regulations imposed on such companies. The government also increases sales tax on demerit
goods or imposes a ban on them to reduce consumption. In this way it regulates the negative
impacts on society

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A market economy under produces the merit goods below socially optimum level and under
consumes it. The government may encourage production and consumption of merit goods such
as education and health care by subsidizing it or reducing the taxes on firms. This will reduce
cost and increase the output. For instance, private sector hospitals may be provided with
subsidies to implement technologically advanced medical equipment. The government may
also directly provide such goods by increasing state expenditure on health care and education
on affordable prices for everyone.

Private sector firms do not take into consideration the harmful impact their production
activities are causing to the environment. For instance, they may dump waste products and
harmful chemicals into the rivers that imposes an external cost on the environment. The
government may then impose indirect taxes and penalties on such firms. Regulations may be
imposed to stop these kinds of harmful activities by firms.

Private sector firms in a market economy may turn into a monopoly or may exercise their
dominating influence by charging excessive high prices and misleading consumers. Hence
government intervenes by imposing penalties on them and pass regulations to encourage
competition between firms.

As the firm’s main aim is to maximize profits because of the self-interest motive these firms
may make the resources redundant if they are no longer required creating unemployed and
leading to underutilization of resources or under employed resources for the society. The
government may then provide jobs to the unemployed in their public firms.

As public-sector firms are in efficient in terms of quality of products so the consumers who can
afford the prices can easily purchase goods and services from private sector firms who will
produce goods according to their wants unlike in a planned economic system they were forces
to consume goods provided by the state.

However, government intervention also has some disadvantages such as it may

distort market signals and increase firm’s cost which may act as a dis incentive to
increase output effecting their profits.

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Market Failure (where the free market fails to allocate resources
efficiently)

• Non-provision of public goods as it will be impossible to charge a price for them.

• Under provision of merit goods below socially optimum level because fewer people will
consume them if a market price is charged, as people will not appreciate their true
value.
• Over provision of de merit goods beyond socially optimum level because more people
will consume them if a market price is charged. and people do not realize their harmful
effects.
• Monopolies exploiting consumers. Monopoly will have control over a market, denying
market competition.
• Information failure: Failure of correct information for e.g. by monopolies that is
misleading information. Or information failure in the labor market that is the labor is
unaware of jobs available.
• Negative externalities by private sector firms

Public Goods

A public good is a product that one individual can consume without reducing its availability to
another individual, and from which no one is excluded. Economists refer to public goods as
"non- rivalrous" and "non-excludable." National defense, sewer systems, public parks and other
basic societal goods can all be considered public goods.

Almost all public goods are non-rivalrous and non-excludable goods. Non-rivalry denotes any
product or service that does not reduce in availability as people consume it. Non-excludability
refers to any product or service that is impossible to provide without it being available for many
people to enjoy. Therefore, a public good must be available for everyone and not be limited in
quantity. A dam is another example of a public good. It is non-rivalrous and non-excludable
because all people within a society benefit from its use without reducing the availability of its
intended function.

Merit Goods

Merit goods are those goods and services that the government feels that people will under-
consume, and which ought to be subsidized or provided free at the point of use so that
consumption does not depend primarily on the ability to pay for the good or service.

Merit goods and services create positive externalities when consumed and these 3rd party
external benefits can have a significant effect on social welfare. Market failure occurs when
merit goods and services are under-consumed under free market conditions.

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Demerit Goods

A demerit good is defined as a good which can have a negative impact on the consumer – but
these damaging effects may be unknown or ignored by the consumer. Demerit goods also
usually have negative externalities – where consumption causes a harmful effect on a third
party (external cost

Demerit goods have these two characteristics:

1. Harmful, unhealthy to the individual consumer.

2. Also, have negative externalities. (Costs imposed on third parties)

Why alcohol is considered a demerit good ?

• Consuming alcohol can cause personal health problems, e.g. long-term liver problems or
hangover the next morning. But, individuals may ignore these costs or think they don’t
apply to them.
• Consuming alcohol can also cause costs to other people (external costs), such as
increased levels of crime and cost of treating disease.

Examination View point

A question on market failure often comes in the exam. The question can come to explain
market failure or how the free market economy fails to allocate resources efficiently

The question can also cover the ways government can reduce or regulate market failure

In an 8-mark answer for market failure you must give both sides. For instance, if you say that
free market economy fails to allocate resources efficiently then you must also state that this
inefficient resource allocation is from the society’s perspective. From the business perspective
the firms perform efficiently by producing goods demanded by consumers.

Market Failure in detail

Market failure occurs when the production or consumption of a good or service causes
additional positive or negative externalities (spillover effects) on a third parry not involved in
the economic activity. In other words, the market forces of demand and supply fail to allocate
resources efficiently.

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Market failure may be caused by the following:

• Production of goods or services which cause negative side-effects on a third party. For
example, the production of oil or the construction of offices may cause damage to the
environment and a loss of green space.
• Production of goods or services which cause a positive spill-over effect on a third party.
An example is training programs, such as first-aid or coaching skills for employees, which
create benefits that can be enjoyed by others.
• Consumption of goods or services which cause a negative spillover effect on a third
party. Such goods are known as demerit goods and include cigarettes, alcohol,
gambling.
• Consumption of goods or services which cause a positive spillover effect on a third
party. Such goods are known as merit goods and include education, health care and
vaccinations.
• Failure of the private sector to provide goods and services such as street lighting, road
signs and national defense due to a lack of a profit motive. Such goods and services are
known as public goods
• The existence of a firm in a monopoly market that charges prices which are too high and
exploits customers.

Government Intervention to reduce Market failure

Governments try to solve market failure in several ways, such as by placing a tax on the price of
a demerit good with the aim of reducing demand for the good. A question can come in the
exam regarding critically evaluating the government intervention methods which would require
the student to tell the advantages and disadvantages of how successful the methods are.

Diagram – The impact of an indirect tax on production and consumption of cigarettes

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In the above diagram, the tax imposed on a packet of cigarettes causes the supply curve to shift
to the left from S1 to S2 (STax). The tax is the vertical distance between the two supply curves.
As a result, price increases from P1 to P2 and the quantity of cigarettes demanded and supplied
decreases from Q1 to Q2. The demand for cigarettes tends to be price inelastic and therefore
the percentage change in quantity traded is Jess than the percentage increase in price. This
means that because the demand is inelastic the effect of decrease in quantity traded in the
market is less than the percentage increase in price. This is because due to a rise in price the
percentage fall in quantity demanded is less because demand for cigarettes is inelastic.

STUDY TIP:
Remember that the level of taxation is measured by the vertical distance between the two
supply curves. The consumer pays the increase in price (P2-P1) and the producer pays the
remainder. The more price inelastic the demand for the product, the greater the proportion
of the tax paid by the consumer and the more the burden of tax transferred by the producer
on the consumer in terms of high prices.

The advantages and disadvantages of imposing a tax on a good or service are shown in below
table

Advantages Disadvantages
It increases the price and therefore should The demand for cigarettes, alcohol and petrol
decrease the quantity traded (Quantity (gas for a car) tends to be price inelastic
demanded as well as supplied) which means that the increase in price may
have little impact on consumption. The
nicotine in cigarettes makes smoking highly
addictive and therefore smokers will pay the
higher price and consumption will change
only slightly. At the same time because
demand is inelastic producers/firms will
transfer the tax burden majorly on
consumers in the form of high price. So, in
reality the producers cost will not rise that
much as the burden has been shifted on the
consumers hence the decrease in quantity
supplied will also be less.
It creates tax revenue for the government The indirect tax will be regressive and have a
which can be used on other goods and greater impact (that is more burden) on low
income earners than high income earners.

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 services such as on health care, education
and infrastructure.
Governments can also impose rules and regulations in an attempt to solve market failure. For
example, imposing a minimum age that a person must be before they are legally allowed to
purchase cigarettes or alcohol may reduce the consumption of such demerit goods. Laws can
also restrict where a person can smoke. In many countries, smoking is banned in public places
such as shopping center’s, bars, restaurants, airports, railways stations and even the beach!

Impact of rules and regulations on demand for cigarettes

The above figure illustrates the impact of a ban on smoking in public places on the demand
curve for cigarettes. The demand curve shifts from D to D1, resulting in the quantity of
cigarettes traded (fall in QD and fall in QS) falling from Q to Q1.

Other examples of laws and regulations imposed to correct market failures include:

• laws regulating where people can drive, cycle and gamble

• regulations imposed to make sure children are vaccinated against certain diseases
• laws making it illegal for people to smoke, eat or talk on a mobile phone while
driving
• motorcyclists being made to wear a helmet and car passengers having to wear seat
belts at all times
• airport authorities regulating the number of night flights
• banning of alcohol sales in Iran, Bangladesh, Brunei and Saudi Arabia.

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Advantages of imposing rules and regulations to correct market failure

• Consumption of the good or service may be reduced.

• Awareness of the negative impacts of demerit goods (such as drinking and driving)
may change the behavior of people in the long term.
• Awareness of the positive impacts of consumption of merit goods (such as
education) is raised.

Disadvantages of imposing rules and regulations to correct market failure

• Restrictions cause underground (illegal) markets to develop where the good or

service can be purchased, often at a very high price.
• The government has no control over the quality of the goods produced in
underground markets, which in some cases can be dangerous for consumption, as
with illegally distilled vodka and tainted baby milk powder.
• People break the rules: for example, under-age smokers and drinkers of alcohol can
bypass the law by obtaining false identification cards. ln the case of smoking, people
may choose to smoke outside buildings and therefore inflict second-hand smoke on
people entering and leaving the building.
• The fine or punishment for ignoring the ban must be enforced and set sufficiently
high to discourage consumption of the good or service.
• Taxes impose a high cost on firms and discourage incentive to produce and enhance
output.
• Taxes may distort market signals and hence give wrong indications that the market
is profitable when it is not and the rise in price is due to rise in cost.

A third approach to correcting market failure is to use education and advertising. Many schools
educate students about the negative side-effects of smoking and passive smoking. In many
countries, cigarette packets must carry a government health warning that dearly explains the
dangers of smoking. The Australian government has made it a legal requirement for cigarettes
to be sold in packets covered in negative images about smoking. The images are graphic aiming
to educate and shock people to discourage them from smoking. If such methods are successful,
the raised awareness of the dangers of smoking should reduce the demand for cigarettes (or
any other demerit good), as shown in the above diagram.

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Another example is the government using informative advertising and education to explain to
people the benefits of eating at least five portions of fruit and vegetables each day. In below
diagram the demand for fresh fruit and vegetables increases from D1 to D2 and the quantity
demanded increases from Q1 to Q2. Healthier people in an economy should mean less absence
from work and school, with fewer people using health services. Therefore, healthy eating
produces an external benefit for society.

Schools around the world educate students about issues such as healthy caring, the negative
impacts of driving gas/petrol-fueled cars and the importance of conserving energy and
recycling. Successful educational programmed should change the pattern of demand, thus
helping to correct marker failures.

Advantages of education and advertising to combat the problems of market

failure

• behavior and consumption patterns of individuals and firms change - there is a rise in
the consumption of merit goods and a fall in the demand for demerit goods. For
example, people learn about the dangers of smoking, so fewer people smoke.
• Successful advertising may lead to a cultural change in the long term, such as healthier
diets, an increase in use of electric cars, recycling, waste reduction and use of renewable
energy.

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Disadvantages of education and advertising to combat the problems of market
failure

• Education and advertising have an opportunity cost - in other words, the money could
have been spent on something else deemed more beneficial to the economy.
• Not all advertising and education is effective. For example, shock advertising tactics may
not necessarily work on smokers and may be ignored.
• It can take a Jong time to educate people and for the advertised message to be accepted
and acted upon.

Subsidy
Governments often subsidize goods and services to encourage consumption. For example,
public transport might be subsidized to encourage people to use buses and trains rather than
private cars. The below figure shows the impact of a subsidy on the demand for public
transport. The bus and railway firms receive a sum of money from the government which
lowers their production costs and causes the supply curve to shift from S1 (pre-subsidy) to S,
(post-subsidy). Price falls from P1 to P, and the quantity demanded increases from Q1 to Q2. An
increase in the use of public transport should lower congestion and reduce the amount of
pollution caused by driving cars. Therefore, the subsidy reduces external costs created by
driving.

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 Remember that the level of a subsidy is measured by the vertical
distance between the two supply curves. The producer receives payment
from the government and passes some of this income to consumers in
the form of lower prices (shown by the distance P1 – P2in the above
diagram and keeps the remainder.

Direct Provision of Goods and Services

There is a conflict between the provision of goods and services directly to people and asking
them to pay for the goods and services. The Law of demand dictates that, as the price of a good
or service rises, less of it will be consumed hence government provides them free especially if
they are essential public services and merit goods. Health care and education are under-
consumed in some countries because people cannot afford to pay. In the short term this has a
negative effect directly on the quality of their lives, and in the long term it causes a potential
decrease in life expectancy and earnings potential. This impacts upon the whole of society
because it means that human resources are not being used to their full capacity.

Advantages of government provision of goods and services

• The goods and services are accessible to all people, regardless of their income or social
status
• Consumption of the goods and services has private benefits to the individual and
external benefits enjoyed by third parties in society if such goods are merit goods.

Disadvantages of government provision of goods and services

• There is an opportunity cost, as the money could have been spent on something else,
such as paying off government debt.
• goods and services that are free of charge may be over-consumed, so long queues or
shortages may arise (for example, the waiting list for a hip replacement operation in a
government hospital may be very

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