i SimpleStudy® 1.4 Government Intervention @ - a 1.4 Government Intervention 1.4.1 Government Intervention in Markets a) Purpose of intervention The government intervenes in markets to address various types of market failure. This car involve different policies and tools, which are often illustrated with economic diagrams. Intervention can take forms such as: Imposing indirect taxation, which can be either ad valorem (based on the value of goods) ‘or specific (a fixed amount per unit sold) Providing subsidies to reduce costs for consumers or producers Setting price controls including maximum prices (price ceilings) to make essential goods affordable, and minimum prices (price floors) to ensure producers can cover the costs of production b) Other methods of government intervention + In addition to the above policies, the government may intervene through other methods such as Issuing trade pollution permits to control the level of environmental harm caused by production State provision of public goods which are non-excludable and non-rivalrous, ensuring availability for ail individuals Provision of information to correct for asymmetrical information that can lead to suboptimal market outcomes Regulation to establish rules and guidelines for market operations and participant behaviors 1.4.2 Government Failure q) Understanding of government failure + Government failure occurs when interventions in the market lead to a net welfare loss rather than an improvement, effectively worsening the situation that was intended to be rectified. b) Causes of government failure + Government interventions can lead to various unintended effects such as: * Distortion of price signals, which can lead to overproduction or underconsumption of certain goods + Unintended consequences, where the intervention has side effects that may create new issues+ Excessive administrative costs, which can make the intervention more costly than the market failure it was designed to address + Information gaps, where the government might lack the necessary information to design effective policies, resulting in misallocation of resources c) Government failure in various markets * The effects of government failure can be observed across different markets and sectors, whereby intervention leads to inefficient resource allocation, decreased economic welfare and can sometimes hamper market functions. It is important to note that the potential for government failure does not necessarily argue fc less intervention overall, but rather for more carefully designed and implemented policies with due consideration to the possibly unintended economic impacts.