Market Failure and Government Intervention
Aug 20, 2015
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
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?