Government Intervention

• Indirect Taxation

  Ad valorem- % of price, used to internalise external costs or generate gov revenue

  Specific tax- fixed amounts per unit, used to target specific industries/products and imposed to address negative externalities or generate revenue
• Subsidies

  Grant provided by the government to encourage the production/ consumption of certain goods or services

  Aim to correct market failures by promoting the provision of public goods, correcting positive externalities, or supporting strategic industries
• Maximum Price (Price Ceilings)


  Government imposed limits on the price of a good or service

  Typically set below the equilibrium price to protect consumers fro high prices
• Minimum Prices (Price Floors)


  Government imposed limits on the price of a good or service

  Typically set above the equilibrium price to support producers, ensuring they receive a fair income
• Tradeable Pollution Permits


  Market based approach to reducing pollution

  Governments allocate a limited number of permits to a firm, allowing them to emit a certain amount of pollution

  Firms can buy and sell permits, creating incentives to reduce emissions efficiently
• State Provision of Public Goods


  Governments provide public goods, which are non excludable and non rivalrous

  Typically funded through taxation
• Provision of Information


  Governments often provide information to consumers to ensure informed decision making

  Information provision can improve market efficiency and protect consumers
• Regulation


  Government rules and standards to ensure market participants follow specific guidelines

  Can address issues like safety, environmental protection, and consumer rights
• Government Failure


  Occurs when government intervention in markets or economic activities leads to an outcome that reduces overall economic welfare
• Causes of Government Failure


  Distortion of Price Signals

  Unintended Consequences

  Excessive Administrative Cost

  Information Gaps
• Distortion of Price Signals


  Government interventions, such as price controls or subsidies, can distort price signals in the market

  Distorted prices may not reflect true supply and demand conditions, leading to overproduction or underproduction of goods and misallocation or resources
• Unintended Consequences 


  Policies aimed at addressing one problem may inadvertently create new problems or unintended consequences

  These unintended consequences can result from imperfect understanding of complex markets and behavioural responses
• Excessive Administrative Costs


  Government interventions often involve administrative costs related to implementation, monitoring, and enforcement

  Excessive administrative costs can reduce the net benefits of a policy
• Information Gaps


  Government interventions may be based on incomplete or inaccurate information about market conditions or the behaviour of economic agents

  This can lead to policies that do not effectively address market failures or achieve their intended goals
• Government Failure in Various Markets 


  Agriculture Price Supports

  Subsidies in Renewable Energy

  Rent Controls
• Agricultural Price Supports


  Government interventions in agriculture, such as price supports, can lead to overproduction of certain crops, surplus stockpiles, and waste

  These policies can result in government expenditures and inefficient resource allocation
• Subsidies in Renewable Energy


  While subsidies for renewable energy aim to reduce environmental harm, they can lead to inefficient resource allocation if not carefully managed

  Over subsidisation can create market distortions and waste taxpayer funds
• Rent Controls


  Rent control policies, designed to make housing affordable, can lead to housing shortages, deteriorating building conditions, and reduced investment in rental housing