2.11: Government Intervention

• Taxation

  - Indirect taxation e.g. excise duty on cigarettes and alcohol

  - Increasing duty on goods increases the cost of production and retailers

  - Leads to an increase in price and subsequent fall in quantity demanded
• Regulation (demerit)

  - Setting rules and restrictions to restrict market freedom and correct market failure

  - Can operate by making some goods illegal or setting age limits for goods or services

  - E.g. regulation to make it illegal for people under the age of 18 to purchase alcohol
• Tradable Pollution Permits

  - Market based approach to the task of limiting pollution emissions

  - Aim to internalise the external costs generated by an activity in order to make the polluter pay for those external costs
• Provision of information (demerit)


  - When the government tries to educate, inform and persuade firms and individuals to change their behaviour

  - May help overcome information failures

  - E.g. adverts to advise consumes to quit smoking
• Production subsidies


  - Payment made by the government to producers of goods to encourage them to increase supply and so reduce price to consumers

  - E.g. higher education in the UK
• Direct state provision

  - Act of providing or supplying by the government e.g. healthcare

  - When a nationalised industry is the main provider of a good or service
• Provision of information (merit)


  - When the government attempts to educate, inform and persuade firms and consumers to change their behaviour concerning a good where the extent of the external benefits is not widely known

  - E.g. eating healthily
• Regulation (merit)

  - When the government create legislation which promotes the consumption of merit goods

  - E.g. making vaccination against certain diseases compulsory
• Minimum pricing


  - Price floors which set the lowest price that can be legally set

  - Can be used to give producers a higher income

  - Can also be done to reduce consumption
• Maximum pricing


  - Price ceilings which set the highest price that can be legally set

  - Used to ensure necessities are affordable
• Buffer stocks


  - A scheme intended to stabilise the price of a commodity by buying excess supply in periods when supply is high, and selling when supply is low

  - Used usually to protect the value of key commodities for a country

  - Aim to stabilise prices, ensure the supply of food and prevent farmers / producers from going out of business
• Government failure


  - A misallocation of resources arising from government intervention

  - E.g. US prohibition which caused Mafia to supply alcohol leading to a rise in organised crime
• Causes of government failure

  - Political self interest

  - Policy myopia

  - Regulatory capture

  - Information failures

  - Disincentive effects

  - High enforcement / compliance costs

  - Conflicting policy objectives

  - Damaging effects of red tape
• Law of unintended consequences


  - How economic decisions may have effects that are unexpected

  - E.g. bank bail outs which raise the problem of moral hazard