5.8 Government intervention in markets. (The reasons for government…
5.8 Government intervention in markets.
The reasons for government intervention in markets.
With government intervention you can correct market failures.
Markets without government intervention are uncompetitive due to monopoly power and producer sovereignty.
The reasons aganist government intervention in markets.
Pro-free market economists
Risk taking people will win or lose at the whim of the market this is better than the government losing public money.
The market mechanism should allow the market to function via incentives transmitted via price signal also long as the market is competitive it will be more productive and efficient than with government interventions.
Correcting market failure
Government provision of public and merit goods
The free rider problems means that without government or charity intervention some pure public goods wouldn't be provided such as the police service and national defence.
The government also try and encourage the consumption of merit goods by controlling the prices and offering subsidies for firms producing merit goods such as providing free state education.
Government intervention negative externalises and demerit goods
Regulation: directly infulences the quantity of a demerit good a firm can produce and thus the level of consumption, such as tabacco.
Taxation: adjusts the price level so to deter people from purchasing demerit goods such as alcohol and cigarettes as they have negative externalites on society.
Price ceilings and floors
A price above which it is illegal to trade this can cause excess demand.
They can lead to a black market forming as people try to sell their goods for the price above the ceiling as there is a demand for it however its against the law.
A price bellow which it is illegal to trade this can cause excess supply.
An example of a price floor is the minimum wage this could lead to an excess supply of labour as the employer can now only afford 1 minimum wage worker where they had 2 when they could control the prices this is a government failure as it increases unemployment.