GOVERNMENT INTERVENTION IN THE
MARKET

Content
• Market failure and government failure
• Competition policy
• Public ownership, privatisation, regulation and deregulation of markets
• Notions of equity
• The problem of poverty
• Government policies to alleviate poverty and to influence the distribution of income and wealth
• Cost Benefit Analysis

Market Failure
• Markets fail for a number of reasons:
– Externalities (social costs and social benefits)
– Monopolies
– Imperfect information
– Factor immobility
– Due to equity issues – where there is a disparity between resource allocation

Government Failure
• This occurs when government interventions either
increase the severity of market failure or cause a new
failure to arise
• This occurs when policies:
– Have damaging long term consequences
– Are ineffective
– Cause more problems than solve problems

Methods of Government Intervention
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Taxation
Subsidies
Buffer Stocks
Pollution permits
State provision
Regulation

Causes of market failure
• Inadequate information this may result from:
– Not doing a cost benefit analysis
– Insufficient information on long term costs / benefits

• Conflicting objectives:
– Governments tend to think in the short term rather than the long term therefore fail to consider long term costs / benefits
– If governments control an industry they may be more concerned with their interests than those of the public
– If the policy interventions lead to negative consequences for consumers / producers e.g. higher income tax

Causes of market failure
• Administration costs – these may be too high to reap
the benefits of the intervention
• Political self interest – politicians may do what is best for them thereby resulting in inefficient resource
allocations

Regulatory Capture
• Regulatory capture this is where a government regulatory agency who are meant to be acting in the public interest
instead becomes dominated by the interests of the existing
firms in the industry it is meant to be overseeing
• Regulatory capture arises from the fact that the current firms have a stake in the outcomes of political decisions therefore ensuring they find a way to influence decision makers

Government policy and the environment
• Environmental change impacts economic behavior
• There is increasing pressure on the government to
consider environmental factors
• The environment is often damaged by negative
externalities caused by consumption and production

Competition Policy
• EU and UK competition policies have the following
aims:
– To increase consumer choice
– To ensure effective price competition between firms
– To help ignite technological i...

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