Government intervention in the market
GOVERNMENT INTERVENTION IN THE
MARKET
Content
• Market failure and government failure
• Competition policy
• Public ownership, privatisation, regulation and deregulation of markets
• Notions of equity
• The problem of poverty
• Government policies to alleviate poverty and to influence the distribution of income and wealth
• Cost Benefit Analysis
Market Failure
• Markets fail for a number of reasons:
– Externalities (social costs and social benefits)
– Monopolies
– Imperfect information
– Factor immobility
– Due to equity issues – where there is a disparity between resource allocation
Government Failure
• This occurs when government interventions either increase the severity of market failure or cause a new failure to arise
• This occurs when policies:
– Have damaging long term consequences
– Are ineffective
– Cause more problems than solve problems
Methods of Government Intervention
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•
•
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•
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Taxation
Subsidies
Buffer Stocks
Pollution permits
State provision
Regulation
Causes of market failure
• Inadequate information this may result from:
– Not doing a cost benefit analysis
– Insufficient information on long term costs / benefits
• Conflicting objectives:
– Governments tend to think in the short term rather than the long term therefore fail to consider long term costs / benefits
– If governments control an industry they may be more concerned with their interests than those of the public
– If the policy interventions lead to negative consequences for consumers / producers e.g. higher income tax
Causes of market failure
• Administration costs – these may be too high to reap the benefits of the intervention
• Political self interest – politicians may do what is best for them thereby resulting in inefficient resource allocations Regulatory Capture
• Regulatory capture this is where a government regulatory agency who are meant to be acting in the public interest instead becomes
MARKET
Content
• Market failure and government failure
• Competition policy
• Public ownership, privatisation, regulation and deregulation of markets
• Notions of equity
• The problem of poverty
• Government policies to alleviate poverty and to influence the distribution of income and wealth
• Cost Benefit Analysis
Market Failure
• Markets fail for a number of reasons:
– Externalities (social costs and social benefits)
– Monopolies
– Imperfect information
– Factor immobility
– Due to equity issues – where there is a disparity between resource allocation
Government Failure
• This occurs when government interventions either increase the severity of market failure or cause a new failure to arise
• This occurs when policies:
– Have damaging long term consequences
– Are ineffective
– Cause more problems than solve problems
Methods of Government Intervention
•
•
•
•
•
•
Taxation
Subsidies
Buffer Stocks
Pollution permits
State provision
Regulation
Causes of market failure
• Inadequate information this may result from:
– Not doing a cost benefit analysis
– Insufficient information on long term costs / benefits
• Conflicting objectives:
– Governments tend to think in the short term rather than the long term therefore fail to consider long term costs / benefits
– If governments control an industry they may be more concerned with their interests than those of the public
– If the policy interventions lead to negative consequences for consumers / producers e.g. higher income tax
Causes of market failure
• Administration costs – these may be too high to reap the benefits of the intervention
• Political self interest – politicians may do what is best for them thereby resulting in inefficient resource allocations Regulatory Capture
• Regulatory capture this is where a government regulatory agency who are meant to be acting in the public interest instead becomes