Government Intervention In The Market

Content
Market failure and government failure Competition policy Public ownership, privatisation, regulation and deregulation of markets Notions of equity The problem of poverty Government policies to alleviate poverty and to influence the distribution of income and wealth Cost Benefit Analysis

Market Failure
Markets fail for a number of reasons:
Externalities (social costs and social benefits) Monopolies Imperfect information Factor immobility Due to equity issues where there is a disparity between resource allocation

Government Failure
This occurs when government interventions either increase the severity of market failure or cause a new failure to arise This occurs when policies:
Have damaging long term consequences Are ineffective Cause more problems than solve problems

Methods of Government Intervention

Taxation Subsidies Buffer Stocks Pollution permits State provision Regulation Extending property rights

Extending Property Rights

Extending property rights is a method the government can use of internalizing the externality. The aim of extending property rights is to reduce the impact of the externality

 Advantages The government doesnt have to assess the value of property as the owners are in a better position to do this There will be a direct transfer of resources from the polluters to those who suffer the firms who pollute will have to bear the

Advantages and Disadvantages of Extending Property Rights Disadvantages:

It can be difficult governments may not have the ability to extend property rights especially overseas Extending property rights within a country can be difficult if the link between the pollution and the problem is unclear Its often difficult for the owner of the property to assess its value to them

Causes of market failure

Inadequate information this may result from:
Not doing a cost benefit analysis Insufficient information on long term costs / benefits

Conflicting objectives:
Governments tend to think in the short term rather than the long term therefore fail to consider long term costs / benefits If governments control an industry they may be more concerned with their interests than those of the public

Causes of market failure

Administration costs these may be too high to reap the benefits of the intervention Political self interest politicians may do what is best for them thereby resulting in inefficient resource allocations

Regulatory Capture
Regulatory capture this is where a government regulatory agency who are meant to be acting in the public interest instead becomes dominated by the interests of the existing firms in the industry it is meant to be overseeing Regulatory capture arises from the fact that the current firms have a stake in the outcomes of political decisions therefore ensuring they find a way to influence decision makers

Market Failure And Government Failure

The marginalist model of externalities is used to explain why externalities result in a misallocation of resources This model looks at marginal social costs and social benefits to enable resource allocation to be efficient By looking at marginal social costs and benefits the government can decide how to impact supply and demand for a specific product decreasing the marginal benefits .

Government policy and the environment

Environmental change impacts economic behavior There is increasing pressure on the government to consider environmental factors The environment is often damaged by negative externalities caused by consumption and production

Competition Policy
EU and UK competition policies have the following aims:
To increase consumer choice To ensure effective price competition between firms To help ignite technological innovations To investigate anti competitive behaviour which can have a negative impact on consumers

Competition Policy
In the UK competition policy looks at:
Control of mergers and takeovers The issues of antitrust and cartel formation Market liberalisation State aid control

Competition Policy - Office of fair trading

The office of fair trading (OFT) ensures that consumers are getting the right prices for products This is to monitor anti-business practices and consumers are protected.

Monopolies and merger competition (M.M.C) and the competition commission

If the OFT has reasonable intelligence to find that a business is being anticompetitive (e.g. charging high prices or restricting consumer choices), the OFT will report those businesses to the Monopolies and merger competition (M.M.C) or the competition commission. MMC investigate if businesses will create unfair competition by taking over companies. Competition commission will investigate if businesses are acting unethically such as charging high prices.

Punishment
The OFT, MMC and the competition commission are likely to investigate businesses with a market share of over 25%. If businesses are found guilty of anticompetitive behaviour they can be: Fined 25% of all profits being made. Of they have to give their market share to other businesses that were affected.

EU Competition Policy
EU competition policy looks at
Restrictive practices Abuse of dominant market power.

This legislation deals with anti competitive behavior The EU has the power to punish anti competitive behavior even if there is no formal agreement to act in an anti competitive manner Penalties include them taking 10% of the firms turnover Some behaviors including market sharing and exclusive marketing can be exempt if they increase either consumer benefits or technical progress

Competition Policy - Costs and Benefits of Policies

Costs

Administration costs in implementing the policy Can be expensive and time consuming to enforce

Benefits Protects consumers from unfair practices Encourages and enhances fair competition

Competition Policy Real World Examples

The takeover of Safeway by Morrisons was investigated to ensure that no unlawful practices occurred Tesco is currently being investigated by the EU

Public Ownership
Public Ownership this is where the government own businesses There are arguments for public ownership which include if goods are seen as public goods then the most efficient way for resources to be allocated may be through the market If externalities exist in the market the government may choose to provide the goods for consumers e.g. education, healthcare

Public Goods
These are services that are provided by the government Pure public goods have the following characteristics:
Non excludability everyone can consume the goods whether they pay or not Non rivalry in consumption consumption by one person doesnt reduce consumption for others

Examples street lighting, national defence

Advantages Provides jobs which are usually protected so reduces unemployment Finite resources such as water and energy can be guaranteed and controlled Able to provide essential services to the whole country

Advantages and Disadvantages of Public Ownership

Disadvantages Higher costs for the government which means higher taxes Inefficiency public organisations are often inefficient due to diseconomies of scale Government and political interference may reduce efficiency of operations

Privatization of Markets
Privatization occurs when organizations that are owned by the public are transferred to private individuals During the 1980s there was intense privatisation of companies in the UK including: British Airways, British Gas and British Petroleum When businesses are privatised it allows for increased competition therefore monopoly power can be removed

Advantages Provides revenue for the government Reduces trade union power Can increase investment as businesses can use capital from sale of shares More incentives to increase efficiency therefore economic welfare is increased

Privatization of Markets Advantages and Disadvantages

Disadvantages Unemployment may result as businesses try and reduce costs Monopoly power may still exist Private sector may fail to allocate resources according to social costs and benefits

Regulation of markets
Regulation is the control of the market through rules Many privatised companies are regulated by watchdogs e.g. Ofcom and BT Regulators ensure that the new companies dont exploit their monopoly power and try and simulate competition allowing the companies to have a smooth transition into the private sector

Deregulation of the markets

This is the act of removing rules and restrictions in the market The aim of deregulation is to open up the market and increase competition Deregulation aims to increase contestability of markets Those in favour of deregulation argue it results in lower prices for consumers, increases investment and in the long term can lead to increased economic growth

Notions of equity
Equity is a notion of the fairness or justice Equality is a notion that everything should be the same People can have different views regarding what they view as fair Differences in peoples views influence policy

Horizontal and Vertical Equity

Horizontal equity states that people with a similar ability to pay taxes should pay the same or similar amounts. This relates to the concept of tax neutrality. Vertical equity states that people with a greater ability to pay taxes should pay more.

The problem of poverty

Poverty can be measured in two ways: Absolute poverty this looks at the amount of people who live below a certain level of income Relative poverty this looks at the extent to which a households income is less than the average income in the UK Relative poverty measures allow us

 The government try and alleviate poverty and create a more even distribution of income and wealth Policies that they use include:

Government Policies to Alleviate Poverty and to Influence the Distribution of Income and Wealth

Working credit and tax credit schemes to encourage low-income households to work National minimum wage legislation Schemes encouraging long term unemployed to work e.g. new deal Minimum guaranteed incomes for pensioners Progressive tax pay more they more you earn and tax free allowances Benefits

Working credit and tax credit

Working credit and tax credit schemes aim to encourage people to go to work on a full or part time basis These schemes allow lower income families to gain more income from working than under previous schemes

National Minimum Wage

This legislation has meant that the lowest paid workers have a guaranteed wage level This can lead to increases in absolute poverty

Schemes Encouraging Long Term Unemployed To Work

These schemes are part of a long term strategy to decrease unemployment levels If people work they will be better off then if they claim benefits It is better for the government to have lower levels of unemployment as it means they dont have to pay out for unemployment benefits and they gain revenue through taxation

Minimum guaranteed income schemes for pensioners

Pensioners are one of the groups of the population most affected by poverty In the UK the current % of pensioners living in poverty is 17% This figure has fallen and this is can partly be attributed to the pension credit scheme

Progressive Taxation
In the UK a progressive taxation is operated by the government Progressive taxation means that at higher salary levels you pay more There is a tax free amount that all people receive and the rate of tax increases as salary increases

Benefits
People who are unemployed, on low incomes or disabled can claim benefits Unemployed people can claim unemployment benefits to cover living costs Benefits are paid to people for the following:
Health care Education Travel Housing School meals and welfare

Policies and Poverty Reduction

In the past 10 years poverty levels have not been reduced in the UK The main reason why poverty has not been reduced is that benefits have not risen at the same price as wage levels so income inequality has risen

Effective Ways to Decrease Poverty

The most effective ways to reduce poverty include:
Increasing the progressiveness of the tax system so it is more equitable Use wage inflation as a basis for increasing the value of benefits and tax credits Investment in training to reduce unemployment Look at indirect taxation and its effects on incomes

Cost benefit analysis

Cost benefit analysis looks at social benefits and social costs Cost benefit analysis involves a number of steps:
Project appraisal Look at the value of social costs and benefits Make an adjustment for time discount future values so you can look at them at the current rate Compare social costs and benefits

Advantages Allows for efficient allocation of resources Decreases negative externalities

Advantages and Disadvantages of Cost Benefit Analysis

Disadvantages Can be hard to put values to social costs and benefits Can be difficult to include all externalities Costs and benefits can be different for different groups

Summary
Market failure occurs when resources are not allocated efficiently e.g. in monopolies or where externalities exist Governments aim to reduce market failure with subsidies, taxation, regulation etc Intervention may increase or create market failure Competition policy aims to reduce unfair competition and monopoly power Public ownership is the ownership of businesses by the government Privatisation occurs when public firms are sold to private individuals Regulation is rules and restrictions imposed by the government on the market , deregulation is the removing of those regulations Equity is the idea of fairness Poverty is a problem for UK governments and they try and alleviate it with a number of policies including benefits, taxation, credits and minimum wages Cost benefit analysis aims to give values to social costs and