Ch24 - government intervention

• Government regulation of competition

  Promote competition and prevent anti-competitive practice
• Government measures to help growth of small firms

  1. Business start-up schemes to provide funds for new businesses

  2. Business services that provide information and advice on running a business and obtaining finance

  3. Lower taxes for small firms
• Lower barriers to entry

  Remove or lower barriers so that more firms can join a market to make it more competitive e.g. remove legal barriers
• Anti-competitive legislation

  Prevent practices that result in reduced competition
• Limit monopoly power

  Appointed body for overseeing monopolies
• Protect consumer interests

  Legislation to prevent business from activities such as making false claims about performance of products, selling goods that are not fit for purpose
• Control mergers and takeovers

  Government often monitor merger and takeovers because large mergers or takeovers are likely to be investigated by bodies. They may be blocked or allowed to ahead if certain conditions are met.
• Minimum wage

  Minimum amount per hour which workers are legally entitled to be paid
• Reasons for minimum wage

  • Many workers on low incomes are entitled to claim welfare benefits from the government. If their incomes are increased by minimum wage, the amount they are entitled to claim will fall => save the government's money
  • As income rises, workers may pay more tax=>which will benefit the government. They will benefit the economy because government can spend more money on education and other services
  • Higher wages may serve to motivate workers=> will help to boost productivity in the economy
  • Employers might respond by making their worker more productive to justify higher wages. E.g. they may invest more in training. They may also replace inefficient labour with efficient machinery => would increase productivity of the economy
• Advantages of minimum wage

  • Guarantees a minimum income for the lowest paid workers
  • Higher income levels help to increase consumption in the economy
  • May incentivise workers to be more productive
• Disadvantages of minimum wage

  • Raises the costs of production for firms who may respond by raising the price of goods/services
  • If firms are unable to raise their prices, the introduction of a minimum wage may force them to lay off some workers (increase unemployment)
• Impact of introduction of minimum wage

  If the government imposes a minimum wage of W1 above the equilibrium wage, by all all workers still receive W1. Economic theory suggests that minimum wage of W1 will have a negative effect on the level of employment. According to the diagram, at a wage of W1, the number of workers employed falls from Q to Q1. Therefore, in theory, a minimum wage will result in job losses.
• The use of diagrams to show impact of the introduction of a minimum wage and the increase of a minimum wage.

  If the government imposes a minimum wage of W1 above the equilibrium wage, by all all workers still receive W1. Economic theory suggests that minimum wage of W1 will have a negative effect on the level of employment. According to the diagram, at a wage of W1, the number of workers employed falls from Q to Q1. Therefore, in theory, a minimum wage will result in job losses.