Government Intervention In Markets

Governments intervene in markets to try and overcome market failure. The government may also seek to improve the distribution of resources (greater equality). The aims of government intervention in markets include:

• Stabilising prices
• Providing producers/farmers with a minimum income
• To avoid excessive prices for goods with important social welfare
• Discouraging demerit goods/encourage merit good

Forms of government intervention in markets:

• Minimum prices
• Maximum prices
• Minimum wages
• Nudges/Behavioural unit

Minimum Pricing:

• This involves the government setting lower prices.

The minimum price could be set for a few reasons:

• Increase farmers incomes
• Increase wages
• Make demerit goods more expensive (Minimum price for alcohol has been established)

• A minimum price will lead to a surplus (Q3 – Q1). Therefore the government will need to buy the surplus and store it. Alternatively, it may impose quotas on farmers to decrease the quantity of the good put onto the market.

Problems with minimum pricing:

• It could be costly for the environment for the government to buy the surplus
• A minimum price guarantee acts as an incentive for farmers to try and increase supply. As an unintended consequence, the minimum price encourages more supply than expected and the cost for the government rises. This happened with the EEC Common Agricultural Policy.
• To ensure minimum prices, the government may have to put tariffs on cheap imports – which damages the welfare of farmers in other countries.

Maximum Price

This involves putting a limit on any increase in price (the price of housing rents cannot be higher than £300 per month)

Maximum prices may be appropriate in markets where:

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