Government Intervention

Tutor2u covers market failure and government intervention on this PowerPoint

http://tutor2u.net/economics/presentations/aseconomics/marketfailure/IntroductionMarketFailure/default.html

Task One

Learn three reasons for Government Intervention

Market Failure

The failure of the market to provide what we want when we want it can mean that government needs to step in.

• Markets might not look after the health of the nation, elderly or those with disabilities very well.
• Markets may not supply sufficient goods Merit goods when required
• Sometimes businesses take advantage of their monopoly position and consumers appear to suffer
• Often negative externalities, such as pollution, are not dealt with by the market mechanism

Wealth Distribution

When it comes to wealth distribution, the markets can sometimes distribute income and wealth in a way we do not like. They leave some people with little or nothing.

• Children in families with very low incomes may grow up in poverty will significant problems in the future and fewer chances to improve their chances in life.
• Very poor quality housing contrast can cause health problems caused by cold and damp conditions
• Some people live rough with no job, income or home

Economic Performance

Helping the economy to perform better (more efficiently) or in different ways

• Helping small businesses to start up by giving tax breaks or grants could be useful
• Providing help for companies trading abroad could help them compete in export markets
• Providing tax incentives to invest in new machinery also helps make the economy more efficient and productive

Three ways that Government might Intervene

Regulation and Legislation (err one and two)

Some argue that it is better if industries regulate themselves. But self-regulation clearly fails sometimes. Regulation of industry is often through bodies such as the Financial Services Authority, which may not be particularly independent or effective.

• Would stronger regulation have helped prevent the near collapse of Northern Rock BS or the recent financial problems?
• Without regulation, would the standard of care be acceptable standard everywhere?
• Without regulation, would taxis be safe? Furthermore, would many other vehicles be safe?
• Would some companies take advantage of their size to take advantage of suppliers and customers?
• Would smokers still be ruining the health of others whilst polluting the atmosphere of pubs?

Financial Intervention

Sometimes a government can use taxes and subsidies to influence the market.

• Making demerit goods more expensive through taxes, should reduce their consumption and will have long-term benefits for society, as well as raising money in the short term.
• Helping out struggling parts of the economy can reduce the undesirable impact of the markets on some sections of society.

There are always alternatives in determining the best thing to do. Should society tax the “gas guzzlers” 4X4s urban carriers, subsidise the fuel efficient ones, or both, or neither.

Remember that changes can have new costs that also need consideration. The cost of the factory that closes because it can no longer compete; the workers who lose their jobs etc.