PE Week 8-Market failure and govt intervention
Page 1: Market Failure and Government Interventions
Page 2: Outline
Introduction
What is a Market Failure?
Causes of Market Failure
Government Intervention and Market Failure
Government Failure
Examples of Government Failure
Conclusion
Page 3: Introduction
The market creates an enabling environment for efficient resource allocation.
Firms seek income and profit maximization, constantly entering or exiting markets based on economic factors.
The price mechanism and market equilibrium contribute to sustainability.
Markets may fail to operate optimally due to various factors preventing productive efficiency, especially in common ownership scenarios.
Government intervention becomes necessary, but potential government failure also exists.
Page 4: What is Market Failure?
Market failure occurs when the price mechanism results in inefficient resource allocation.
Defined as a situation where the forces of demand and supply cannot allocate resources effectively.
Page 5: Causes of Market Failure
Several factors disrupt the price mechanism in resource allocation:
Externalities
Free-rider Problems
Asymmetric Information
Page 6: Externalities
Arise when production/consumption harms third parties (e.g., pollution).
Negative Externality: Environmental damage affecting communities (e.g., polluted rivers).
Positive Externality: Benefits to third parties from a product that would be underproduced by market forces.
Page 7: Free-Rider Problems
Occurs when the benefits of a product exceed private benefit, making it unprofitable in a market context.
Efficiency in markets is best achieved through two-party agreements.
Free-rider problems emerge when non-payers can benefit from goods/services.
Page 8: Asymmetric Information
Exists when some participants in a transaction have more information than others.
Leads to market inefficiency as consumers may rely on more informed producers.
Used strategically, knowledgeable producers can direct consumer choices, potentially resulting in market failure.
Page 9: Government Intervention and Market Failure
Various approaches address different types of market failures.
Page 10: Government Policies to Address Market Failure
Methods include:
Market-based instruments
Government spending
Publicity and information initiatives
Government regulations
Negative Externalities: Taxes and levies (e.g., landfill tax).
Free-Rider Problems: Provision of public goods, tax relief for contamination clean-up.
Asymmetric Information: Green deal initiatives, energy performance certificates.
Page 11: Government Taxation
Tax collection for 2023-2024: £829.1 billion.
Major components: Income Tax, Capital Gains Tax, National Insurance Contributions (57%).
VAT and business taxes comprise 21% and 10%, respectively.
Recent taxation patterns focus on modifying private expenditure while also raising revenue.
Taxation incentives affect consumption patterns moving towards electric and fuel-efficient vehicles.
Page 12: Landfill Tax
Aims to promote alternative waste disposal methods.
Classified into lower rates for non-toxic waste and standard rates for other types.
Construction industry incurs significant waste and pays £3.30/tonne for lower rates and £103.70/tonne for standard rates.
Page 13: Climate Change Levy
Tax applied to energy usage by businesses/non-domestic sectors.
Charged per kilowatt with varied rates according to energy source (e.g., electricity taxed higher than coal).
Aimed at motivating businesses to account for their negative externalities.
Page 14: Aggregate Levy
Charged on the commercial use of natural aggregates.
Excludes exported aggregates in the UK.
Designed to minimize noise and environmental impact from quarrying.
Encourages recycling and reduction of aggregate demand in construction.
Page 15: Government Spending
Addresses excludability related to the free-rider problem by promoting public goods.
Public goods examples: National security, street lighting.
Categories of goods include public, private, and quasi-public goods.
Page 16: Tax Relief
Public goods facilitate government intervention to supply goods/services that generate external benefits.
Tax relief serves as incentives for the private sector to innovate beneficially for society.
Page 17: Regulation, Publicity, and Information
Involves setting regulatory standards and providing information to guide market decisions.
Less likely to increase business costs but can be viewed as generally ineffective.
Page 18: Government Regulations
Involves legislation to manage business decisions and minimize negative externalities.
Example: Building Regulations to control construction standards.
Page 19: Publicity and Information
Government efforts to raise awareness and support market decisions, addressing transparency issues.
Example: The Carbon Trust helps with low-carbon technology opportunities.
Page 20: Is Government Intervention Effective?
Many government interventions to address market failures have proven ineffective.
Raises the question of whether markets could allocate resources more efficiently than bureaucratic government systems.
Page 21: Market Failure and Government Intervention
Summarizes causes of market failure alongside interventions:
Externalities: Taxation/levies
Free-Rider Problem: Public goods, tax credits
Asymmetric Information: Campaigns, building regulations enforcement
Page 22: Measurement Problem
Government accountability for negative externalities can be obscured due to difficulty in measurement.
Examples include business activities impacting ecosystem integrity which are hard to quantify.
Page 23: Tax Burden
Free-rider problems hinder effective provision of public goods; costs are shared indirectly through taxes.
Citizens may essentially work for the state’s tax obligations early in a calendar year.
Page 24: Enforcement Problems
Rule-based interventions incur costs for implementation and compliance oversight.
Example: Non-compliance with Building Regulations often goes unpunished.
Page 25: Government Failure
Suggests policies may not improve economic efficiency.
Factors causing government failure include poor judgment, lack of information, corruption, and bureaucratic inefficiency.
Increased government intervention may reduce individual liberty and competitive market dynamics.
Page 26: Rent Control
Intended to curb excessive rental prices in housing markets through maximum pricing policies.
Failure arises as rent caps dissuade landlords, reduce rental stock, and can lead to black markets.
Page 27: The Common Agricultural Policy
Aims to stabilize volatile EU agricultural market prices and guarantee minimum income for farmers.
Causes economic burden due to excess supplies purchased by the government, promoting overproduction.
Page 28: Subsidizing Public Transport
Intended to alleviate road traffic and enhance public transport’s accessibility and affordability.
Policy fails as public transport remains less preferred by higher earners and may still be costly for taxpayers.
Page 29: Fishing Quotas
Aims to handle excessive fishing depleting resources.
Failure evidenced by continuous depletion of stocks and wasteful discard practices.
Monitoring and enforcement raise significant costs.