Government Intervention on Market Failure

Market failure is when goods and services are not allocated efficiently and could happen in a number of different ways. A few examples of market failure that I would show today would be when there is too much negative externality and demerit goods, and too little positive externalities and merit goods.

Negative Externality & Positive Externality

Negative externality is when a third-party is negativity effected from the business activities. Like for example, pollution from a factory.

Positive externality is when a third-party is positively effected from the business activities. Like for example, preventing illnesses to spread as people have taken immunization shots.

This can usually cause in either an increase or decrease in the production of the type of good or service as externalities are usually not taken into account by the cost benefit analysis.


Merit Goods & Demerit Goods

A merit good is a type of good or service that is considered good as it causes positive effects for the consumers.

A demerit good is a type of good or service that is considered bad as it causes negative effects on the consumers.

Most of the time, demerit goods causes negative externalities. The reason to this is that most people do not know that demerit goods will cause negative effects to them. Due to this, demerit goods, which are desirable, will increase in supply as demand for these types of goods increase. Prices would still stay low as negative and positive externalities are not taken into account. Like for example, cigarettes were desired by most people in the past. Prices for a pack were very cheep and people back then did not know the harmful effects, in other words negative externalities, that smoking a cigarette could cause. Thus, a failure in the market.

On the other hand, merit goods cause positive externalities. However, without the positive externalities taken in to account, merit goods are usually under supplied. Added to this, people also so not have enough information stating that merit goods, such as vaccines, would be beneficial for them. this will lead to a low demand for the said merit good and therefore would also be supplied less. Thus again, a failure in the market.

Government Intervention

So how does the Government fix this market failure?

For demerit goods, the government usually controls its demand and supply. They do this by putting taxes, quotas, and rules and regulations. An example of this could be seen in Singapore. The government has put a 69% tax rate on cigarettes and the results were that consumption of cigarettes, which is a demerit good, has decreased.

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By doing this, it also tackles another market failure, negative externalities. With demerit goods controlled, the negative externalities that is caused by the production and/or consumption of it would also be controlled. In this case, more people would be healthier as they are away from the negative effects that cigarettes can cause such as cancer.

For merit goods, governments would provide subsidies, impose laws and promote the positive externalities that could come from merit goods. An example for this is that in Singapore, certain types of vaccinations are mandatory for children. By doing this, people would be less prone on getting infected by diseases from their friends and family. this will thus cause a decrease in general on the amount of people who are sick and unhealthy.

However, some merit goods are hard to provide as externalities are now included in the costs. for demerit goods, this is a good thing as with higher prices, people are discouraged to buy the expensive good, and thus demand will fall and the demand for it will be controlled. For merit goods however, people would need to be encouraged to buy them. so the government can intervene buy providing subsides to merit goods.


Asian Market Failures and Government Intervention

What are the market failures?

~ Negative externalities

A cost that is suffered by a third party as a result of an economic transaction.

~ Control of Monopoly Power

When one or more of the participants has the ability to influence the price or other outcomes in some general or specialised market.

~ Instability in the economic cycle

It is when the economy is not stable say for example, recession occurs

~ Instability in the agricultural market

It would be when there is either excess supply or shortage instead of the right amount of supply.

How do governments intervene to solve them?

  1. A recent example of the government intervening to fix the instability in the market would be when recently the China stock market crashed because some investors thought growth was slowing because, Chinese firms were in or approaching a lesser-growth phase, which is called approaching market saturation. The government intervened by buying the shares, their main goal was to prevent a crisis in investor confidence which could lead to a panicky sell-off with worse effects than the irrational run-up.


2.  The second example would be of how the government controlled the monopoly power in China. There were surprise raids by Chinese government officials on the office of major multinationals in China to catch out monopolistic business activity, especially after China has enforces a anti-monopoly law.

Tens of millions of dollars have already been paid by companies that have been judged to be engaging in unfair monopolistic pricing. Other businesses dropped their product prices in attempt to deflect being investigated.

Chinese government officials will have to and are trying to fully and rigorously enforce the anti-monopoly law across the full spectrum of firms operating in China’s markets, foreign, private and state-owned alike if Chinese firms are to grow strong and competitive at the same time.


Google images

3. The third example is about the pollution in India which is counted as an negative externality. More than half of the rivers in India are polluted with vast quantities of municipal and industrial waste discharged into them everyday. Much of India’s air pollution comes from coal-fired power plants, crop burning, domestic cooking with firewood or cow dung and vehicles burning diesel fuel.

India’s Prime Minister Narendra Modi has made cleaning the Ganges, the major river that is holy to Hindus, a key policy goal. At the launch of a new national air quality monitoring index, Modi also urged Indians to curtail waste and conserve resources even and they become wealthier, in order to prevent environmental catastrophe. He called in his compatriots to pledge that “Once a week we will not use any kind of products that use any kind of energy.”

He blames the changing lifestyles that have come with India’s 25 years of rapid economic development for rising pollution levels that have given the country some of the world’s dirtiest air. He says that “Until we focus on our lifestyle and get the world to focus on it, we will not succeed despite all other measures taken.”

He believes that even though the government takes action the rest of us need to do our part to clean our air.


Google images

4. The last example is of food shortages in Nepal. Over 70% of Nepal’s population works in the agricultural sector, accounting for 38% of the GDP. Nevertheless, Nepal struggles to produce and adequate supply of food for its citizens. This is because farmers have limited access to improved seeds, new technologies and market opportunities. Almost 50% of Nepal’s population is undernourished, and nearly half of all children under 5 are chronically malnourished, which can often result in lifetime damage.

The government of Nepal as made food security a national priority. USAID-supported programs already have demonstrated impact by increasing agriculture productivity and incomes of smallholder farmers. Nepal continues to receive USAID support for scaling up programs that sustainably increase agricultural productivity and facilitate access to markets. USAID also will support improved nutrition by increasing the production and consumption for nutritious food products and improving hygiene and access to safe water.

The government of Nepal has improved their agricultural state by taking the helping hand.


Innovative Countries

Dynamic efficiency in an important concept in economics. It is connected to innovation and to productive efficiency. By investing in new processes, better management of human resources and technology, countries and companies will be able to reduce its cost curves. It will allow businesses to reduce both their short term and long term average cost curves.

Here is a neat graphic on the world’s most innovative countries.


Image Source

It’ll be great to research what these countries do to boost their innovation.

Please share your thoughts on this topic in the comments below 🙂

China’s Labour Market

China is one of the most fastest growing economy in the world today. This is due partly because of the cheap labour they had before 2014. However, wages have been steadily increasing for the last 10 months and because of this, it has caused a big effect in China’s labour market.

Minimum Wages

Displaying chinamap.jpg

In China, the minimum wage differs in each region. The highest minimum wage given in China is in Shenzhen which is 2030 yuan. In Shanghai 2020 yuan, Beijing 1720 yuan, Tainjin 1850 yuan and Hainan 1270, which is the lowest among the 14 cities and provinces.


When we average the total minimum wage, we could see in the graph that the minimum have increased through the years. The cause of this would be because of the diminishing supply of labour. This can cause shifts in the demand of labour and also affect the different trade unions in various ways.

Demand and Supply of Labour

  So what happened with China’s supply of labour? As we can see from the graph, the workforce is shrinking and it is also projected to continue decreasing. This is largely due to the demographic changes. In the 2nd chart, we could see that people who are not within the workforce age, people who are younger than 15 and older that 64, are expected to increase and surpass the number of people in the workforce.

As the supply of labour decrease, minimum wage increases, and companies struggle to find labour in lower costs. This therefore leads to the shift from urban areas to rural areas. Like for example, a company from Shenzhen would move their factory to Hainan where labour is cheaper.

On the other hand, collage graduates are struggling to find well paid and high skilled jobs due to the oversupply of educated workers, therefore increasing the competition. Companies now need lower skilled workers like for example, factory workers, and with more higher skilled workers, even though they are capable on doing a low skilled job, they would refuse to work for a lower skilled job.

Government Policies and Trade Union

Due to the low skilled labour supply,the government is attempting to promote vocational schools. vocational schools are school that trains the future workers basic skills of working in a certain area. The government is doing this because companies still need low skilled labour and furthermore, it will also increase the working age population too.

However, there is a dark side to the labor conditions in China. Researchers found out that low skilled factory workers could be easily exploited by employers. Most employees do not know that a trade union existed and therefore the power of some trade unions is not very significant in business activity in China. Moreover, the All-China Federation of Trade union (ACFTU), one of the largest legal trade union in the world, is not a ‘proper’ trade union. Most members do not even know they are in the union, as it is an automatic member ship after going into a company, and ACFTU is run by people who are in a government position who does not have any prior experience in labour organizing.

But things are improving slightly since then. Workers have been taking actions as they are more aware of trade unions. They are now making independent unions  and even though they do not have a legal right to strike, millions of workers still organize unofficial strikes against companies. it is slowly getting more power and this is also partly the reason on why minimum wages have increased.


Indonesia’s Labour Market

Demand For Labour 

~The demand for labour is still increasing for the businesses in
the export market due to the depreciation in the exchange rate
which influenced the price of the exports making it cheaper so
demand for the exported products increased causing firms to require more employees.  ( The exchange rate is shown below)

~A good command of written and spoken English is a qualification
job seekers looking to join multinationals in Indonesia must
possess. As more companies worked towards increased cohesion among business units, professionals who could understand the business
partnering role of their function were highly sought-after.
Indonesia’s positive economic market conditions and the entrance of multinationals into the market have opened up more job
opportunities for the local workforce. It is important for
businesses to have bilingual employees.

~ Other key points for 2015 include high demand for skills among
accounting and finance candidates, particularly in the financial
control, risk and compliance sectors. In addition, there will be
more job opportunities for asset managers, investment bankers and
insurance specialists.

~ In 2011 the government launched a masterplan for acceleration and expansion of Indonesian economic development which will be done from 2011-2025 (MP3EI).The main aim is to increase transportation and improve infrastructure. This government spending on these factors will increase the demand for labour in the following years as the project goes on.

~The Indonesian working age population, the labour force participation rate and the employment rate are expected to continue to increase as Indonesia reaps the benefits of a demographic dividend. The working age population (15 years and over) is projected to increase to 197.4 million by 2019.6 By 2019 Indonesia’s labour force is projected to have increased to between 129 and 131 million people and the number of people employed is expected to reach between 120 and 123 million people.7 The labour force participation of young women.

So from this we can see that due to the number of young labour increasing in the labour force of indonesia it will attract more investment in the country as businesses always want to set up a production plant in countries with young labour so by looking at those figures we can see the potential rise in demand for young Indonesian workers and which would lead to an increase in the labour supply for the country. 


Click to access wcms_329871.pdf

Minimum wage

A total of 29 Indonesian provinces have already confirmed their new provincial minimum wages for the year 2015. Overall (excluding the four remaining provinces), the average Indonesian minimum wage rises 12.77 percent (y/y) in 2015. Although this growth is considerable, it is smaller than Indonesia’s minimum wage growth in 2014 (19.10 percent y/y). The highest minimum wage growth occurred in the province of Bangka Belitung (28 percent), while the lowest wage increase was in Riau (0.58 percent).

1. Kota Bandung Rp 2.310.000
2. Kota Cimahi Rp 2.001.200
3. Kabupaten Bandung Rp 2.001.195
4. Kabupaten Bandung Barat Rp 2.004.637
5. Kabupaten Sumedang Rp 2.001.195
6. Kabupaten Subang Rp 1.900.000
7. Kabupaten Purwakarta Rp 2.600.000
8. Kabupaten Karawang Rp 2.957.450
9. Kabupaten Bekasi Rp 2.840.000

~ The table below shows how the average minimum wage has changed over the years. We can see that it has increased with time.

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~ From an article on this website ( i found out that a particular issue has bothered the labour unions and that is that the formula for calculating the minimum wage ignores the cost of fuel. (the government just raised the fuel price by 30 percent). The unions also feel the cost of phone service and refrigerators need to be in the market basket.

In the article it is reported that the Governor of Jakarta Basuki Tjahaja Purnama approved a 2015 minimum wage of $219 a month, while unions want about $285 a month. A worker on the Jakarta wage council said at least % million workers will join rallies, including assemblies outside the offices of the governor and president to protest this low minimum wage.

According to press reports, 50,000 people marched through Jakarta, Indonesia’s capital, in a militant display of popular anger.

Sources:—asia/—ro-bangkok/—ilo jakarta/documents/publication/wcms_368198.pdfhttp://—asia/—ro-bangkok/—ilo-jakarta/documents/publication/wcms_343144.pdf

Supply of Labour

~ According to the table shown on this website (  the supply of labour has increased between 2004-2013 from the lowest of 103 million people to the highest of 121 million people.

~ The Indonesian government decided to focus efforts to further tackle poverty and inequality. These include improving access to schooling which would increase the supply of labour because more people will be educated and skilled to work.

~ The ILO fights for women’s rights to work and has been quite successful as seen a lot of the workforce consist of women. Enabling the women to work has increased the supply of labour in Indonesia.

Screen Shot 2015-10-06 at 12.01.37 PM

~ The aims of ILO shown above will lead to an increase in the supply of labour and an improvement in the skills the employees have. The organisation is trying to make sure that the employees are qualified for the labour markets especially after a lot of technological change. If more employees are being educated and trained to be professionals the labour market will grow.

~ As shown below in the graph the number of employed people have increased over the years and is predicted to continue to increase. In 2016 the number of employed people is predicted to increase quite a bit. From this we can see that both the demand for employees is going to continue to rise and also the supply because more and more people and going to get employed.


~ The high number of young people entering the labour force in the future warrants further investment in school-to-work transition strategies, in order to ensure that young people can access emerging employment opportunities.


Click to access wcms_329871.pdf

Trade unions and their power

~ An article on this website ( mentions that trade unionism is at risk in Indonesia.

President Jokowi appointed several labor activist (leaders of trade unions) as commissioners of state-owned enterprises and social security providers this means that the trade unions lost their leaders. This would not only discredit unionism in the country but also downgrade the bargaining power of workers when dealing with the government and employers. The involvement of labor activists in practical politics by joining the campaigning team of certain candidates in presidential and  local elections will cost unionists their leverage in the negotiation of wage, outsourcing and other disputes with employers and the government.

Most workers have been reluctant to join and unionists are rarely vocal for fears of bearing the brunt of discrimination in the workplace and dismissals. The recent dismissal of two middle-level workers of Jakarta International Container Terminal (JICT) for protesting the container terminal’s concession to a Hong Kong-based company is just one example of union busting.

Despite the reform movement 17 years ago, unionism has remained weak, although in the 2000s a number of hard-line union leaders were involved in anti-government rallies and national bipartite and tripartite dialogues.


Government policies that affect the labour market

The Indonesian Constitution of 1945 outlines the State’s mandate provides for the welfare and justice of its citizens in accordance with the ideals of independences. In order to achieve the development of objectives of the current five year period, the Medium Term National Development Plan 2010-2014 has been used as the main guideline for the development of economic and social goals including employment.

The policy direction of national development that include employment plan which focus on manpower development and expansion refers to the outline of Medium Term National Development Plan 2015-2019. This medium plan consists of various labour and employment program, such as follows:

  • Improving the manpower competency, quality and productivity to create a competitive labour force and new entrepreneurs;
  • Managing a conducive work climate to build a harmonious industrial relationship;
  • Increasing intensity and quality of labour norm inspection and law enforcement;
  • Improving the function of labour market institution and the facility of manpower domestic and overseas placement as well as creating job opportunities through productive resources empowerment;

The government has  created an unemployment plan in 2014 to improve the Indonesian labour market.

To support this program, several plans will be implemented such as:

  1. Infrastructure development of roads, harbours/airports, telecommunication, railways, etc. in the rural and outskirts areas to help local resources create jobs and improve local economic activities.
  2. Develop open market should be developed by providing facilities, incentive policies and conducive environment for private sector running its business. Indonesia supports SMEs financing as they are an important factor in fostering high economic growth and employment, especially labour absorption.
  3. Promote entrepreneurship to empower labour force to create job.This endeavour is conducted through entrepreneurship program for university graduates who have entrepreneurial passion and productivity orientation. Training and support, in both technical and managerial skills, will be given to help new entrepreneur to run their small/medium business by utilising available natural and human resources.
  4. The empowerment and optimalisation of public vocational training centres, aimed to improve the quality and productivity of labour force, will be continued in the near future
  5. To encourage job creations, the government have provided a variety of tax-related incentives such as tax incentives for labor-intensive businesses, and an increase in non-taxable income. These policies will be continued in the future to further spur economic growth and create employment. In addition, new simplified tax policy for small and medium businesses is targeted to improve SMEs’ business operations and management while promoting better access to investment and banking services.

Female participation

Indonesia has a ministry with a vision of addressing female participation issues, gender equality and the fulfilment of children’s rights, namely: Ministry of Women’s Empowerment & Children Protection. The main purpose of the Ministry of Women Empowerment and Child Protection are:

1) To provide programs and gender-responsive government policies;

2) Ensure improvement and fulfilment of women’s rights;

3) Ensure improvement and fulfilment of children’s rights;

4) To ensure the realisation of the policy on gender responsive data system and in accordance with the interests of the child;

5) Making management accountable.

Policy Measures Targeting Labour Market Disadvantage

The government has formulated effective and productive programs and policies to empower disabilities, youth and female labour forces through various programs, such as skill development, training for entrepreneurship, apprenticeship, applied appropriate technology, capacity building, labour intensive program and Independent Professional Youth Employment.


Wage Discrimination 

~The conventional view of wage gaps between men and women is that they have been steadily narrowing over recent decades and this trend will inevitably continue as women achieve higher education levels and enter areas of the workforce which have been dominated by males in the past.

Unfortunately recent evidence from Indonesia suggests that pay parity between the sexes remains some way off.

Using the country’s 2010 labor force survey, we found that gender wage differences remained significant and pervasive —as they are for most of the world.  

The data shows that female workers monthly real wages were 30.8% lower than those of male workers, with the wage gap slightly wider (31.5%) in urban centers than in rural areas (29.9%). This gap exists even after variables like the number of hours worked, marital status, number of children, the type of work, and industry category are controlled.

When we break down the numbers we find that the vast bulk of the wage difference is derived from gender discrimination. The portion of the overall gap of 30.8% due to discrimination is 28.7%, meaning female workers receive 28.7% less than male workers due to gender discrimination. The rest of the gap (2.1%) is explained by non-discriminatory factors like hours worked or educational attainment by female workers. In urban centers, 27.6% of the wage gap is due to gender discrimination, and in rural areas discrimination accounts for 28.9%.

Educational attainments, the number of children below 10 years old, and marital status are all factors affecting a woman’s entry into the workforce. Equally, the number of hours worked and years of experience in the target position are significant determinants of monthly wage levels.  However our research makes it clear, persistent wage gaps are still predominantly determined by gender discrimination.

This problem of course goes far wider than just Indonesia. It is common all around the world and the message is clear. Governments need to put in place equal pay legislation for male and female workers with comparable credentials and experience, and make sure it is enforced, with the public sector leading by example.

Ultimately, an efficient labor market in which equally qualified female and male workers receive the same pay, will be a key factor in achieving sustainable and equitable economic growth in the long run.


Co-Writer and Researcher: Saurabh Tyagi

Japan Labor Market Research

Japan Labor Market Research

For Japan, “land of the rising sun”,  the title of “the 3rd largest economy in the world” was not simply handed out to them – they earned it. Considering that they are third only to China and the United Stated of America whilst taking into account the size of their country and where they are placed – leaves them vulnerable to natural disasters – it truly is a feat to behold. Therefore, for our labor market research we chose the “land of the rising sun”  and measure how their citizens help their country raise the sun.

Demand for Labor

Due to being awarded host country for the 2020 Olympics Japan has recently felt a rise in the demand for construction related jobs and as such the demand for labor in that specific market has recently seen a rise. Actual wages has also increased or at least is expected to rise in the construction industry. However Japan is also affected by China’s recent slowdown and as such has been suffering along with China.

Japan has had a shortage of workers for a while now and as long as this trend keeps up there will always be high demand for workers. Especially in recent years due to the fact that Japan’s aging population is starting to enter their retirement years. Although it is true that Japan’s population work longer than the average and retire at later it will still happen and as such there is a gap that will be left when they retire.


Screenshot (314)


Supply for Labor

“As the population pyramid becomes inverted, the labor pool shrinks from year to year.”
As seen in:

This can be seen happening just by looking at the current demographics of Japan’s current population. The demographic below illustrates a country with an aging population with the demographic having an inverted pyramid shape forming. An aging population will have more people choosing to retire and thus exit the labor market or are much more susceptible to death due to old age and be forced to exit the labor force market. Therefore it would explain why the labor pool shrinks from year to year.

Screenshot (312)



  • Women in the Japanese Workforce

Women are flooding into the workforce in unprecedented numbers. Nearly 65 per cent of women aged between 15 and 65 are working, the highest percentage since records began in 1968.

There is a catch. The majority of these jobs are badly paid, part-time or both. Too many companies still view men as the primary wage earner: younger women are there to look pretty and older women to do the drudgery. If Japan is to progress, such attitudes need to change.”

As seen in:

Screenshot (316)

  • Influx of Immigrants coming into Japan

Screenshot (320)


With an aging population leads to more people leaving the workforce due to old age and retirement – so it comes with no surprise that the Japanese would loosen their immigration laws to attract foreigners into Japan. As seen in the graphic above, we can see that there is a large jump in the number of permanent immigrant inflows over the past few years. Being permanent residents in Japan it would be safe to assume that the country has experience an increase in the number of “naturalized” as they would need jobs to provide for themselves. Therefore, it would be safe to assume that the number of “naturalized” workers has increased.

Trade unions and their power

Japanese trade unions have become increasingly weaker and weaker as time progresses:

“Labor union demands for wage increases were boldly submitted. To underline their steely determination, workers walked off the job in the spring. Trains were halted, leaving millions of commuters stranded and angry. The world watched to see how many days or weeks it would take Japanese business leaders to fold and to agree to wage hikes large enough to satisfy the labour union negotiators.

But that was the character of Japan from the 1950s to ’70s – the high-growth era in which this East Asian nation rose from the ashes of a bitter wartime defeat to eventually reach the heady status of the number-two economic power in the world.”

 “In the 1970s, there were almost 6,000 strikes on an average year, but last year there were only 68.”

The causes of how trade unions are at their current weakened state is explained in this snippet:

For one thing, Japan’s conservative governments became less tolerant of labor activism and large-scale strikes as the years went by. Socialist and communist parties with which labor unions were affiliated either weakened substantially at the polls, or else disappeared altogether.

Both a cause and a symptom of the decline in big labor’s power is the increase in the number of irregular workers in the national economy as compared to regular employees – those who still benefit from Japan’s famous lifetime employment system. A larger number of Japanese, especially women, work as part-timers, dispatched workers, and contract workers; in other words, people who serve their companies for lower wages on an hourly basis and with fewer legal protections.

The extent of these effects can be seen in this snippet:

The Japan Socialist Party serves as a particularly striking example. In the 1990 general elections the party won 136 seats in the House of Representatives. Now called the Social Democratic Party, it gained only two seats in last December’s general election and is on the verge of losing its legal qualification as a full-fledged political party.

Minimum Wage

The minimum wage in Japan is ¥780 an hour. This, according Bloomberg allows Japanese citizens to buy a bowl of noodles. This may change due to the fact that the Japanese wage rise has not been keeping up with its inflation rate which is 2.1% increase in wages while there was a 2.3% inflation rate in the same year. This does not seem significant however for the few Japanese people that are just scraping by a 0.2% fall in their purchasing power could mean that they have to work longer hours just to keep up with their expenses.

Japan has one of the highest minimum wage in the world. But the prices are relatively lower than most capitals of the developed world. This means that the Japanese people tend to have a higher purchasing power parity than other countries.

Government Policies on Labor Market

Due to recent cases of death by overworking the japanese government has recently enacted a law that forces workers to take vacations. Although this law has been enacted it is not enforced by the government and is generally ignored by everyone. People are still dying from overwork and it has not changed much.

The minimum working age in Japan 15 but under special circumstances children of the age 12 and over are allowed to work.

The maximum hours a worker is allowed to have per week is 40 hours not including rest periods. And the worker is not allowed to work more than 8 hours a day excluding rest periods.

Japan has a lifetime employment system where it is hard for a company to fire a worker and hence when there are redundant areas in the company they ask their workers to voluntarily retire or move them to a work-less section of their company until they resign.


  • Demand for Labor

Link to video:

  • Supply for Labor

  • Trade unions and their power

  • Minimum Wage

  • Government Policies on Labor Market

  • Featured Image

(Image is not our own, all ownership goes towards Danny Choo and Culture Japan inc. and other respective owners.  No copyright infringement was intended)