Government Intervention Revision

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Government Intervention Revision

  1. 1. Market Failure and Government Intervention
  2. 2. Intervention
  3. 3. Intervention
  4. 4. Anti-Monopoly
  5. 5. Anti-Monopoly
  6. 6. Social Benefits
  7. 7. Social Benefits
  8. 8. 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?
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. Production Quotas Price Quantity A strict output quota Deman d Q1 P1 Supply
  19. 19. Production Quotas Price Quantity A strict output quota Deman d Q1 P1 Supply Q2
  20. 20. Production Quotas Price Quantity A strict output quota Deman d Q1 P1 Supply P2 Q2
  21. 21. Maximum Prices Price Quantity Deman d Q1 P1 Supply
  22. 22. Maximum Prices Price Quantity Deman d Q1 P1 Supply P max
  23. 23. Maximum Prices Price Quantity Deman d Q1 P1 Supply P max Q2Q3
  24. 24. Minimum Prices
  25. 25. Minimum Prices Wage Quantity of labour Deman d Q1 P1 Supply
  26. 26. Minimum Prices Wage Quantity of labour Deman d Q1 P1 Supply Q2Q3 Min Wage
  27. 27. 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?

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