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.