Government Intervention Introduction

What is government intervention?

Government intervention is when the state gets involved in markets and takes action to try to:
- Correct market failure
- Improve economic efficiency
- Improve macroeconomic performance
- and/or change the distribution of income and wealth

In recent years, several governments have also tried to use interventions designed to use
behavioral nudges to change the behavior of consumers and businesses.

Thinking activity:
Parents are a bit like the “government” for their children and must develop various approaches
for managing their children’s behavior.

Behavior that parents might want to manage includes:

- Stopping children from smoking or taking drugs
- Limiting “screen time.”
- Helping with chores around the home e.g., laundry, cooking, cleaning, gardening
- Getting enough exercise
Possible methods include:
- Setting rules
- Providing information
- Withholding allowances/ increases allowances
- Grounding
- Confiscating

We usually need a variety of interventions/interventions may work for some people but not all…
we need to consider them on a ‘case by case basis.’

Government Intervention Types

Government Intervention and Stakeholders

Businesses:
- Exporting firms
- Monopolies vs small firms
- Manufacturers and service sector

Customers:
- Single-person vs multiperson households
- High-income vs low income

Employees:
- Salaried/hourly wage / zero-hours contracts
- Full-time or part-time

Shareholder:
- Financial institutions, e.g., pension fund
- Individuals
- PLC or Ltd firm

Government:
- Right-wing / Left-wing
- Majority / Hung parliament

Trade Unions:
- High-density / low-density
- Private vs public sector

Suppliers:
- Domestic / overseas
- Integrated supply chain

Community:
- Local / national / international

Indirect taxes: unit and ad valorem

Examples of indirect taxes:

- Value added tax (VAT)
- Plastic bag charge
- Fuel duties
- Alcohol duties
- Tobacco duties
- Sugar tax
 - Carbon taxes
- Landfill tax

Indirect tax:
- A tax on the sale of goods and services
- Causes the supply curve to shift upwards (left) because it raises the costs of production

Ad valorem tax:
- A percentage tax, e.g., 20% on the sale price
- Causes a pivot shift of the supply curve.

Specific (unit) tax:

- A set tax per unit, e.g., £5 per unit
- Causes a parallel shift in the supply curve

Unit (specific) taxes

- A unit tax shifts the supply curve by the amount of the tax
- It causes a parallel shift
- The market price increases, and the quantity traded falls

Thinking activity:
Can you explain why an ad valorem tax will cause a pivot shift in the supply curve?
Indirect taxes: Identifying tax revenue
Identifying the total tax revenue is a crucial exam skill. It might be the case that you need to
calculate the value of the tax revenue. To do this, you need to calculate the area of a rectangle.
Perfectly inelastic demand and perfectly elastic supply:

Perfectly inelastic demand and a regular upwards-sloping supply:

Regular downwards-sloping demand and perfectly elastic supply:

Perfectly elastic demand and a regular upwards-sloping supply:

Indirect taxes and externality diagrams

Externalities occur in an economy when the production or consumption of a specific good or

service impacts a third party that is not directly related to the production or consumption of that
good or service.

- When there are negative production externalities, there is overproduction because of

MSC > MPC.
- If the tax is set “correctly,” then the MPC curve shifts up by the amount of the tax,
resulting in the socially optimal level of production at Q*
- This means that the market failure has been corrected.

Why might it be challenging to set the tax at the right level in practice?
- The impact is on third parties and not accounted for in a market mechanism.
- Information is lacking, and we may not know if these problems even exist or if they could
occur in the future. It is very difficult to account for costs in the future thinking about
today.