MARKET INTERVENTION

• Measures used to correct market failure

  • Regulation
  • Anti-trust policy
  • Taxation
  • Privatization
  • Deregulation
  • State ownership
  • Subsidies
  • Legislation
  • Market creation
• Government's response to public goods market failure

  1. Produce them themselves and fund via taxation

  2. Pay firms in private sector to produce

  3. Subsidize private production

  4. Raise tax to pay for goods

  
• Regulation of monopolies


  • Introduce fresh competition into the market
  • Break up existing monopoly power
  • Appoint regulators to impose price controls (ceiling) to prevent excessive prices
  • Price ceiling can cause shortages
• How government uses taxes to regulate a monopoly

  1. Impose a lump-sum tax on the monopolist

  2. Increases the average cost curve

  3. Reduces the monopolist's profit

  4. Profit goes to government to provide social services

  5. May disincentivize the firm to continue operating

  
• Subsidies


  • Provide financial incentives for producers to increase supply of goods with positive externalities
  • Encourage consumption of such goods
  • Stimulate innovation through R&D support
  • Promote equity by assisting disadvantaged groups or regions
• Taxation on firms contributing to negative externalities

  Reduces output to socially efficient level where MSB=MSC
• Taxation to correct negative externalities may have high administration costs and miscalculate external costs
• State ownership (nationalization)


  • Public ownership of firms to provide goods/services sold in the market
  • Prominent in provision of utilities
  • Governments take over natural monopolies to prevent excessive pricing
• Privatization


  • Change in ownership of an activity from public to private
  • Governments privatize loss-making state-owned companies
• Deregulation


  Liberalization of regulation to promote competition by removing barriers to entry
• Pros of government intervention

  • Regulation has positive impact on behaviour
  • Antitrust policy promotes competition
  • Taxation provides government revenue
  • State ownership ensures access
  • Subsidies increase domestic production
  • Legislation has positive impact on behaviour

  
• Cons of government intervention

  • Regulation has high operation/admin costs
  • Antitrust may not work for natural monopolies
  • Taxation has high administration costs
  • State ownership has high bureaucracy/inefficiency
  • Subsidies may be unsustainable
  • Legislation has difficult/costly enforcement

  
• Corporate code of conduct

  Firms set guidelines for operating with consideration for environment, employee rights, product safety, compliance with laws, high production standards, and information provision
• Corporate social responsibility (CSR)

  Voluntary agreements between government and private parties to achieve environmental objectives or improve environmental performance
• Deadweight loss is how monopoly causes market failure