Government Intervention Overview PDF

2.11 Government intervention - an overview In a predominantly ‘free market’ economic system, governments take the view that markets generally work well in allocating resources efficiently; the government adopts a ‘laissez faire’ (let alone) approach, the government generally steps back to allow the...

2.11 Government intervention - an overview In a predominantly ‘free market’ economic system, governments take the view that markets generally work well in allocating resources efficiently; the government adopts a ‘laissez faire’ (let alone) approach, the government generally steps back to allow the forces of supply and demand to set prices (using the price mechanism) and allocate resources. In all economies, there will be some government intervention in some markets; the extent to which a government intervenes will depend on the extent to which policy makers believe markets are failing to deliver an efficient allocation of resources. Some intervention may also be on alternative grounds, such as ‘equity’ (social justice / fairness), and this may conflict with the objective of allocating resources efficiency (maximising social welfare). Government intervention by policy makers However, where specific markets fail to deliver an efficient allocation of resources, or fail to deliver equitable outcomes, there is an argument for government intervention, to correct market failure in markets that fail to allocate resources efficiently. Possible forms of government intervention: Taxes (used within taxation), including indirect taxes, a charge imposed on parties involved in economic transactions to reduce the allocation of resources to demerit goods, and to reduce the allocation of resources to products causing negative externalities. e.g. taxes on petrol and diesel. Subsides (linked to state funding – see below) payments by government to reduce costs of production / reduce price for consumers, to lower the market price of merit goods, and to lower the price of products with positive externalities e.g. bus/rail journeys. Regulation - rules and legislation, including minimum standards, to control, in some way, economic activity in markets. e.g. laws that prohibit (ban) certain products or activities. Such as the ban on use of lead as a fuel additive; UK rules to increase the ethanol content of unleaded petrol. Price controls; a form of price regulation (controls) Minimum price controls (price floor) Maximum price controls (price ceiling) State provision (government expenditure) either through State production e.g. National Health Service (NHS) / LA run state school services. State funding e.g. the government might pay private sector bus companies to run late nigh services to rural areas; academies are funded to offer state education services in the UK. linked to subsidy (see above). Buffer stock schemes – combined use of a maximum price (price ceiling), a minimum price (price floor), and store of buffer stocks, used to help stabilise prices in markets. Tradable pollution permit schemes – combined use of regulation (cap) and creation of new markets (trade) using property rights (permits) to pollute. Others: Information provision Public/private partnerships Competition policy Linking possible market failures to potential interventions (policy options) Failure: Demerit goods and/or negative externalities Possible interventions Indirect tax emissions, to impose charges on perpetrators so that externalities are ‘internalised’ – polluters are made to pay, or ‘ the polluter pays principle’; input taxes (fuel) are also used where emissions are difficult to measure. Regulation - Legislation to prohibit (ban) activities that lead to external costs – using standards to limit permitted production levels and/or impose product standards Subsidies provided for producers/consumers of alternative products that do not generate negative externalities, or ones that are not demerit goods Provide better information for consumers (in the case of demerit goods) Tradable pollution permits (creating markets for pollution) Failure: Merit Goods and/or positive externalities Possible interventions Subsides to producers to increase supply of merit goods, or subsidise consumption. Legislation, such as laws to make education/training attendance compulsory until 18 State provision, ‘free’ at the point of use education/health (funded from general taxation) Provide better information for consumers (in the case of merit goods) Failure: Information failure Possible interventions Government provide information (leaflets, advertising, school resources & info centres) Legislation to ban misleading advertising, or unfair use of information. Regulation of how advertising and wider product marketing is conducted Legislation to ensure disclosure of important information (insurance, finance…) Failure: Public & Quasi-Public goods Possible interventions State provision of public goods (national nuclear defence) and quasi-public goods (roads, library services, flood defence…) Subsidise private firms to deliver services, funded by government from taxation revenue. Problem: Market dominance Possible interventions Legislation to prevent mergers and takeovers that threaten competition by creating monopolies. Regulation of monopoly by an industry regulator, including price controls (i.e., setting maximum prices monopolies, or oligopolies can charge – gas price cap) and encouraging competition. Anti-cartel laws. Banning price-fixing by groups of firms, to ensure competition is sustained. Failure: ‘Unacceptable’ income distribution – equity issue Possible interventions Redistributive tax i.e. progressive taxation (such as income tax) Means tested redistributive benefits (such as Universal Credit) Subsidies of essential products mainly consumed by the poor e.g. bus transport, staple food products Maximum prices (such as price ceilings for basic food products, fuel, and rent) Minimum wages for lowest paid workers; guaranteed minimum prices for certain producers in deprived areas or low-income essential activities (i.e., farmers?) Government failure occurs when the intervention by government leads to a less efficient allocation of resources than would have been achieved without intervention.