In: Business and Management

Submitted By abc123456789
Words 878
Pages 4
1. “…the division between the ‘haves’, who own houses, and the ‘have-nots’, who do not, has been one of the most prominent market failures in the UK housing market” (Extract C, lines 10 –12). In the light of this statement, evaluate the case for and the case against government intervention in the housing market in order to correct or to reduce market failures in such a market.

Market failure arises when the free market mechanism fails to provide a socially optimum level of output in this case houses. In this case the free market mechanism is under producing houses which is one of the reasons for the increasing house prices in recent decades.
One way in which the government could intervene is to increase the supply of houses. This is because an excess supply along the demand curve will force prices to decrease, thus enabling the have not’s to be able to purchase houses.

This can is shown on diagram above where a shift in the supply curve from S to S1 has caused the supply to increase causing an extension in demand and also lowering this price.
Such a decision is difficult because as mentioned extract B the price elasticity of supply is 0.5 which means it is inelastic. In other words the supply of houses is not responsiveness to changes in price. Therefore such a decision is not feasible in the short term however can be implemented in the long term by another strategy.
Another strategy used can be the used is the use of Subsidies by the government. The government can provide builders who are the suppliers of the housing market which a subsidy to increase output.

As shown on the diagram on the left a subsidy will shift the supply curve to the left. This is because the quantity of houses supplied will increase from Q1 to Q2 and then price would also decrease from P1 to P2. This will make it more affordable for the have not’s to purchase homes. However such…...

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