Intro to government intervention

• Why do governments intervene?

  To correct market failure

  • In many markets, there is a less than optimal allocation of resources from society's point of view, resulting in market failure

  Redistribute income and wealth 

  • Intervention seeks to achieve a more equitable (fairer) distribution of income and wealth to improve lives of citizens
  • Taxing the rich to support poorer households can reduce poverty and have impacts on individuals and the economy

  Support firms

  Collect tax revenues 

  • Governments need money to provide essential services, public goods and merit goods
• What do free market economists argue that government intervention should be limited to?

  • Free-market economists argue that government intervention should be limited to all but the most basic services such as the provision of national defence
  • Other economists argue that the government should intervene in all areas of the economy to ensure the most efficient and equitable distribution of resources
• Common types of intervention to correct market failure?

  Indirect taxes, subsidies, price controls, state provision, regulation, property rights, pollution permits
• What is an example of government intervention?

  • The UK government provides subsidies to consumers to purchase electric vehicles
  • The subsidy lowers the relative cost and may incentivise consumers to purchase an electric car. If there is increased demand, producers may allocate more resources to producing these goods
  • The UK government has set a price cap (maximum price) that energy suppliers can charge consumers for a unit of energy. This is to ensure that energy prices are fair
  • The Office of Gas and Electricity markets (OFGEM) regulates this market