1. Government Intervention In The Market

2. 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

3. 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

4. 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

5. Methods of Government Intervention
Taxation
Subsidies
Buffer Stocks
Pollution permits
State provision
Regulation
Extending property rights

6. 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

7. Advantages and Disadvantages of Extending Property Rights
The government doesn’t 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 negative effects
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

8. 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
If the policy interventions lead to negative consequences for consumers / producers e.g. higher income tax

9. 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

10. 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

11. 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 .

12. 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

13. 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

14. 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

15. 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.

16. Monopolies and merger competition (M. M
Monopolies and merger competition (M.M.C) and the competition commission
If the OFT has reasonable intelligence to find that a business is being anti-competitive (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.

17. 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 anti-competitive 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.

18. 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

19. Competition Policy - Costs and Benefits of Policies
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

20. 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

21. 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

22. 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 doesn’t reduce consumption for others
Examples – street lighting, national defence

23. Advantages and Disadvantages of Public Ownership
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
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

24. 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

25. Privatization of Markets – Advantages and Disadvantages
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
More competition brings more choice for the subject
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

26. 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 don’t exploit their monopoly power and try and simulate competition allowing the companies to have a smooth transition into the private sector
They become involved in activities such as price capping

27. 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

28. 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

29. 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.

30. 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 to look at inequalities in incomes and wealth

31. Government Policies to Alleviate Poverty and to Influence the Distribution of Income and Wealth
The government try and alleviate poverty and create a more even distribution of income and wealth
Policies that they use include:
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

32. 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

33. 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

34. 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 don’t have to pay out for unemployment benefits and they gain revenue through taxation

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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
Look at net rate of return for each project

41. Advantages and Disadvantages of Cost Benefit Analysis
Allows for efficient allocation of resources
Decreases negative externalities
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

42. 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 benefits thereby resulting in more efficient allocation of resources