Market Failure and Government Intervention

Intervention

Intervention

Anti-Monopoly

Anti-Monopoly

Social Benefits

Social Benefits

Types of intervention

• When asked to write about government intervention in markets – remember

1) Why is the intervention justified?

2) Can you use a diagram to show the effects?

3) Consider in your evaluation:

a) Effectiveness of a policy

b) Does a policy improve economic efficiency?

c) Are there equity issues? (e.g. fairness)

d) Are there possibilities for government failure?

Regulation of Consumer

Real world example

Which market failure?

Key aims Risk of government failure

Tanning Salons

Drinking Laws

Information failure

De-merit goods

Lower demand

Adjust perceived private benefits

Compliance costs

Dangers of paternalism

Regulation of Producer

Real world example

Which market failure?

Key aims Risk of government failure

Equal pay act

Maximum C02 emissions for vehicles

Inequality / discrimination

Externalities / climate change

Reduce exploitation

Lower emissions

Compliance costs

Extra red tape for business

Indirect tax on producer

Real world example

Which market failure?

Key aims Risk of government failure

Tax on aviation fuel

Carbon tax on businesses

Externalities

Climate change

Internalise externalities

Incentives to control pollution

Who pays the tax?

Unintended consequences

Charge on consumer

Real world example

Which market failure?

Key aims Risk of government failure

Congestion charge

Prescription charges

Externalities

Information failures

Avoiding over-consumption

Making better use of scarce resources

Unintended consequences

Costs of collection

Equity concerns

Producer subsidy

Real world example

Which market failure?

Key aims Risk of government failure

Bail outs for banks

Wage subsidy in a recession

Market failures from unemployment

Promoting consumption of merit goods

Positive externalities

Lowering prices and costs

Increasing demand

Promoting jobs and competitiveness

Trade effects

Distortion of the market

Opportunity costs of bail outs

Moral hazard from supporting businesses that have failed

Consumer subsidy

Real world example

Which market failure?

Key aims Risk of government failure

Car scrappage scheme

Subsidy for installing solar panels

Merit goods

Imperfect information

Poverty and inequality

Lower prices and provide incentive to buy

Create new demand and jobs

Similar to producer subsidies

Low elasticity of demand

Rising demand for imports

Environmental concerns

Import tariff

Real world example

Which market failure?

Key aims Risk of government failure

Tariff on Chinese shoes

Structural unemployment in industries affected

Change the pattern of demand

Protect jobs

Retaliation

Higher prices hit consumers

Distorts markets

Maximum price

Real world example

Which market failure?

Key aims Risk of government failure

Price capping for roaming charges on mobile phones

Exploitation of monopoly power

Lower prices for consumers – especially for those travelling abroad

Capped prices – operators will raise prices elsewhere to compensate

Minimum price

Real world example

Which market failure?

Key aims Risk of government failure

Minimum wage Exploitation of lower paid workers in the labour market

Wage floor – a decent wage

Boost living standards of the lowest paid workers

Incentive to look for work

Possible risk of higher unemployment

Costs of compliance

Production Quotas

Price

Quantity

A strict output quota

Demand

Q1

P1

Supply

Production Quotas

Price

Quantity

A strict output quota

Demand

Q1

P1

Supply

Q2

Production Quotas

Price

Quantity

A strict output quota

Demand

Q1

P1

Supply

P2

Q2

Maximum Prices

Price

Quantity

Demand

Q1

P1

Supply

Maximum Prices

Price

Quantity

Demand

Q1

P1

Supply

P max

Maximum Prices

Price

Quantity

Demand

Q1

P1

Supply

P max

Q2Q3

Minimum Prices

Minimum Prices

Wage

Quantity of labour

Demand

Q1

P1

Supply

Minimum Prices

Wage

Quantity of labour

Demand

Q1

P1

Supply

Q2Q3

Min Wage

Improve your evaluation

• Discussing costs and benefits to producers and consumers

• Negative or positive interventions?

• Thinking about short and longer-term effects of a policy

• Be aware of value judgements

• The law of unintended consequences

• Remember the costs of intervention can large!

• Importance of combinations of policies

• Can freely-functioning markets find their own solution to a problem?