Government Intervention (2.4)

Government Intervention

When the state gets involved in markets and takes action to try to correct market failures and so improve economic efficiency.

A mixed economy

An economic system where both market forces and government are involved in resource allocation decisions.

Economic aims of the the Irish government.

1. Achieve full employment:

2. Manage national debt:

3. Care for the environment:

4. Ensure price stability:

5. Achieve Economic Growth:

6. Ensure fair distribution of wealth:

Balanced Regional Development

An effort to enhance well-being and living standards in all region types, and improve their contribution to national performance and more inclusive, resilient societies.

How do governments intervene in the economy?

• Imposing laws: governments can pass legislation to protect participants in society.

• Providing Public Provision: the government may act as producers for certain services.

• Taxation: the government collects direct and indirect tax. Income tax can be used to alter behaviour and tackle problems of inequality(redistribution of wealth)

• Expenditure: the government may provide subsidies and grant. Any payment made with the purpose of promoting growth and increasing the amount produced or consumption of a good may be made by the government.

Legislation vs Regulation

Legislation is about making laws while regulation is about putting those laws into action and making sure they are followed.

Price Ceiling

The mandated maximum amount a seller is willing to charge for a product or service. It is below the market price (P1>PE) and Leads to excess demand (QD>QS)

Price Floor

Sets a minimum purchase cost for a product or service. Above the market price (P1<PE) and leads to excess Supply (QD<QS)

What are the effects of a price ceiling on Rental Accommodation?

1. Increased Demand for Rental Accommodation

2. Increased Standard of Living for low-income earners

3. Fewer properties to rent

Advantages of Government Intervention

1. Attracts FDI: government attracts FDI through grants and subsidies to set up and employ workers.

2. Regulates the development of Monopolies: Can pass legislation to prevent anti-competitive monopolies.

3. Provides Employment and Social Welfare:

4. Provides essential state services:

5. Public goods: The government provides good that would otherwise not be provided due to it being non-excludable e.g. traffic lights.

Disadvantages of Government Intervention

1. Reduce Entrepreneurship:

2. Bureaucracy: Government agencies can be slow in providing essential information and documentation given the high volume of regulation involved.

3. Inefficiency: The Government has different priorities than business people. The government does not seek out the best value for money which leads to inefficiency.

4. Non-incentivised Public Sector Workers: Since Pay is fixed, public sector workers may not be incentivised to work harder leading to low worker productivity.

5. Public Sector Trade Unions: Several powerful trade unions can bring the country to a halt at short notice through industrial actions and strikes, if the government does not listen to their demands.

Privatisation

When the government sell state owned assets/businesses to private investors/the private sector.

Arguments for Privatisation

• Government Revenue: The government will receive a large sum of money that they can use to repay the national debt.

• Efficiency: State owned enterprises are often inefficient as they can rely on government funding. Private firms are driven by a private motive and so are more efficient.

• Competition: The elimination of a state owned monopoly can lead to open market competition and can result in greater choice and lower prices for consumers.

Arguments against Privatisation

• Increased Unemployment: Private firms are profit motivated, this means they may reduce staff numbers if it’s profitable.

• Lack Social Commitments: Non-profit making essential services may be discontinued by the private business in order to achieve profit maximisation.

• Loss making Companies: Only the profitable state-owned companies can be privatised therefore the government will be left with only loss-making state-owned companies.

Nationalisation

Taking an industry or assets into public ownership by a government.

Arguments for Nationalisation

• Provision of Essential Services: Nationalisation allows the government to ensure an essential service is made accessible to everyone in a way that prevents exploitation and protects the consumer.

• Stability and Protection of Workers: Nationalised industries can provide stable job opportunities for workers. Governments may prioritise job security and fair wages for employees in these industries, protecting them from sudden layoffs.

• Strategic Planning and Long-Term Vision: Nationalisation allows the government to plan and invest in critical infrastructure and industries that might not attract private investment due to long payback periods or high risks.

• Profit for Public Investment: Instead of private companies generating profits for shareholders, nationalised industries can generate revenue for the government.This money can then be reinvested into public services.

Arguments against nationalisation

• Inefficiency and Bureaucracy: Without the motivation of profit, there may be less incentive to innovate or improve operation.

• Reduced Investment:

• Opportunity Cost: Nationalisation requires significant financial resources from the government. This might mean diverting funds from other crucial sectors or increasing taxes which could have an opportunity cost in terms of investment in areas like education, healthcare, or infrastructure.

Regulation

The controlling of an activity or process, usually by means of rules.

• Advantages of Regulation

• Improved Health and Safety: Consumers are protected from substandard and unsafe products through regulations imposed by the Irish Government and the EU.

• Protect Consumers from Exploitation: Government regulation of large firms may help to reduce the likelihood of firms earning large supernormal profits at the expense of consumers.

• Prevent Anti-Competitive Behaviour: Regulation can put an end to cartels between competing firms and can also assess whether a merger would be competitive within an industry.

• Protect the Environment

Disadvantages of Regulation

• Impede Profitability: Regulation involves excessive paperwork and checks. This can slow down efficiency which impedes output.

• Net Cost on Society: As Regulation is passed onto the businesses, it may increase the costs of doing business and this cost is passed onto consumers in the form of higher prices.

• Time Consuming/Ineffective: Regulation takes time to implement efficiently and means businesses lose time adhering to new rules and regulations.