government intervention

• GOVERNMENT intervention:

  • S- subsides
  • T- taxes
  • R- regulation
  • I- information provision
  • P- pollution permits
  • S- state provision
• Minimum price INCREASE "bad" goods above equilibrium price
• Maximum price DECREASE "good" goods below equilibrium
• 4 causes of government failure:

  1. distortion of the price mechanism
  2. unintended consequences
  3. information gaps
  4. adoration costs
• Maximisation price scheme= price below E= excess demand/ shortage
• Minimum price scheme = price above E= excess supply/ surplus
• Both min and max intervention are examples of disequilibrium
• Unintended consequence

  • speed bumps
• Information gaps:


  Alan Green, banks giving loans recklessly= the financial crisis
• Information gaps 


  difficult decisions= gov failure
• Indirect tax: 


  aim of addressing market failure imposed on producers ( raise prices)
• Example of Indirect tax

  • Valorem tax
• Tax incidence meaning?


  How the final burden of tax is shared between the producers and consumers
• Adv of indirect tax

  • Correct market failures
  • source of rev for gov
• Dis of indirect tax

  • hard to determine the size of the tax
  • unintended consequence
  • regressive
• consumer subsides

  • payments to consumers to allow them to purchase more of good or service
• adv of producer subsidies

  1. encourages investment
  2. encourages merit goods
• Dis of producer subsides:

  1. opportunity cost to gov
  2. firms less incensed to develop
• Evaluation of subsides?


  Costs and benefits
• price control:


  if the market price is sub-optimal for social, environmental or political reasons, the government may decide to control the market price directly
• the rationale for the maximum price

  • necessities more affordable
  • consumption of goods that good social welfare (PE)
• Government intervention


  max price = excess demand= rationing function
• Maximum prices in markets

  • rent control
  • bus fare price cap
• Problems with max price:

  1.suppliers may leave if the price not high enough to profit

  2.other gov interventions
• Minimum price:


  rationale: Incomes and jobs of producers and encourage investment and innovation

  discourage (NE)
• Minimum price


  the firm lost signalling and incentivising function
• Examples of minimum prices in markets

  • national minimum wage
  • agricultural support where price is needed for farmers
• problems with a minimum price

  1. Excess supply
  2. alternative policies from the gov ie taxes
• Government failure 


  government intervention worsens the allocation of resources = net welfare loss
• Causes of gov failure:

  • political self-interest
  • conflicting objectives
  • poor value for money
• Outcomes of GOV failure

  • greater inequality
  • unintended consequences
• DIS gov intervention

  1. profit motive incentives businesses
• ADV Gov intervention

  • reduce inequality
  • provision of public goods
  • rules ab competition