Copyright 2007 – Biz/ed Government Intervention in Markets

Copyright 2007 – Biz/ed Government Intervention in Markets

Copyright 2007 – Biz/ed Working Time Directive

Copyright 2007 – Biz/ed National Minimum Wage

Copyright 2007 – Biz/ed National Minimum Wage Wage Rate (£/per hour) No. Employed D Lab S Lab Assume that the current equilibrium wage rate is £3.00 per hour which is seen as being unacceptably low 4.90 Min Wage Government imposes a minimum wage above equilibrium at £4.90 per hour for those over the age of Demand for labour from employers falls, supply of labour (employees) rises Potential Unemployment

Copyright 2007 – Biz/ed Government Failure

Copyright 2007 – Biz/ed Government Failure Distortion of Markets: –Price ceases to act as a signal for resource allocation –Tendency for shortages and surpluses to exist in the long run –Difficult for people to make informed choices based on cost, value, etc.

Copyright 2007 – Biz/ed Government Failure Distortion of Incentives: –Income taxes – distort incentives to work –Business taxes – stifle initiative, investment and enterprise –May encourage ‘underground markets’ – smuggling, forgeries, etc.

Copyright 2007 – Biz/ed Government Failure Rent Seeking and Log Rolling –Consequence of having to make choices –Results from lobbying – often powerful sectors of the economy –Concessions or decisions made to provide one good or service at the expense of another –Chosen good may not be in interests of all but only to a minority who have a powerful influence over decision makers –(See James M. Buchanan (Nobel Prize winner) and Gordon Tullock – Public Choice Theory)

Copyright 2007 – Biz/ed Government Failure Administrative Cost: –High levels of bureaucracy –e.g. cost of administering CAP and farm support scheme is huge! Conflicting Objectives: –e.g. reducing smoking and beneficial effects on health and welfare against rights of people to do as they please and tax revenue –Governments do not always know what is best for us – e.g. are the policies on illegal drugs/prostitution/pornography, etc. the right ones??

Copyright 2007 – Biz/ed Government Failure Inadequate Information: –Knowing the consequences of the policy (e.g. building new motorways) –Knowing the effect on other markets (e.g. steel tariffs in USA) –Lack of knowledge on costs and benefits – private costs – possibly yes; social costs??? –Lack of knowledge about what the public actually wants – do we want a ban on smoking in public places??