Government intervention in the market

  • Why governments intervene in markets
  • the various ways in which the government intervene
  • the situation known as government failure, which arises when government intervention in the markets is unsuccessful or creates new problems 
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Why governments intervene in a market

  • To maximise the social welfare of the whole community
  • To try to eliminate, or at least reduce, market failures that are deemed to be occuring
  • OR to prevent the emergence of market failure in the future
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The various ways in which governments intervene in

  • In the case of missing markets associated with public goods, government intervention replaces the market, with the government providing goods such as roads and defence
  • By contrast, in the case of partial market failure, where markets do function but prices signal the wrong information and create the wrong incentives
  • Governments may replace or abolish the market
  • OR  try to adjust prices so as to correct or at least reduce the resource misallocation that unregulated or 'free' market forces are responsible for

Price adjustment occurs through the use of:

  • indirect taxes
  • subsidies 
  • maximum price laws (price ceilings)
  • minimum price laws (price floors)
  • Buffer stock intervention 
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Main policies governments use to achieve their obj

  • Regulation
    - Deter monopoly abuse 
    - Force people to consume merit goods (eg car seat belts)
    - restrict consumption of demerit goods
    - control the emission of negative externalities
    - Promote positive externalities 
  • Taxation
    - Altering prices within the market
    - Indirect taxes - 'polluter must pay' 
  • Subsidies 
    - encourage consumption of merit goods and the production of positive externalities  
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Government failure

  • Government produces an unsatisfactory outcome
  • Either the government intervention is ineffective and has made no change to the market problems current 
  • OR the government intervention has created new problems in the market which where not there before

"Governments may create rather than remove market distortions; inadequate information, conflicting objectives and administrative costs should be recognised as possible sources of government failure"

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