Government intervention in markets

Why is government intervention necessary?

To correct market failures, which lead to a deadweight loss of welfare.

Types of market failure that warrant intervention

• Negative or positive externalities

• Merit and demerit goods

• Public goods

Govt. objectives influencing intervention

• Economic growth

• Resource allocation

• Improved confidence

• Fiscal management

• Equity

Methods of govt intervention

Indirect taxation, subsides, maximum & minimum prices, state provision, regulation, pollution permits, provision of information

Subsidy - Definition

Any form of government support offered to producers and occasionally consumers

What are the effects of subsidies

They reduce the marginal cost of supply and therefore lead to an increase in output of a good/service at a lower market price

Arguments for subsidies

1. Helping poor families with food cost

2. Encouraging investment in sectors like renewable energy

3. Protect jobs in loss making industries hit by external shocks

4. Improve housing and transport affordability to improve geographical mobility of labour

5. Reduce the cost of training and employing workers

Drawback of subsidies

1. Producers can become dependent on them

2. They distort resource allocation potentially leading to surpluses

3. Environmental risk from excessive production

4. Government failure arising from political lobbying

5. Can be expensive and taxpayers better the cost

Minimum prices – definition

Legally imposed price flows like the minimum wage or guaranteed price support schemes for farmers

They may also be a legal minimum retail price on alcohol, e.g.

How do minimum prices help farmers?

They stabilise their incomes through a price floor

Three disadvantages of alcohol minimum prices

1. If demand has high PED, it could hit production and profits and jobs and drinks industry

2. Impact on high consumption groups it is a regressive policy for low income families

3. Doesn’t generate tax revenue for the government

Drawbacks of minimum price

1. Create market distortions leading to excess supply

2. May lead to discounted exports

3. Discourages innovation and efficiency as less incentives

Maximum price – definition

A legally imposed maximum price or price ceiling in a market that applies cannot exceed

What’s the aim of maximum prices?

To improve affordability of a good/service to consumers, particularly those in lower incomes

Examples of maximum prices

Rent controls utility price caps or payday loans with their interest capped