2. Today`s Discussion
• Addressing the non-provision of public goods
• Addressing the over-consumption of demerit goods and the
under-consumption of merit goods (link back to ME)
• Controlling prices in markets (taxes, subsidy, min price,
max price)
3. • There are several types of government intervention on market
equilibrium.
• The form of interventions are fixing higher or lower limit on
prices in certain markets and imposition of taxes and subsidies
for certain items.
• This type of government intervention in the market can be
explained using demand and supply analysis.
3
Introduction
4. Government Intervention
• The main reasons why government intervene market:
▫ To correct market failure: it is necessary for
government to provide public goods and merit goods, as
these goods will be underprovided in free market.
▫ Market failure: free market does not make best use of
scarce resources.
▫ Improve the efficient in allocation of resources.
▫ To achieve equal income and wealth distribution.
5. Methods of Government Intervention
1. Regulation: various means by which government seeks to
control production and consumption.
• Rules and laws that applies to firms to control the free
market.
• Uses legal or other methods such as control of price,
quality and quantity of goods and services that are
produced or consumed.
• E.g. doctor prescription to buy controlled drugs.
7. Methods of Government Intervention
• Advantage of regulations:
• prevents overconsumption of merit goods
• Avoid abuse of market power
• Reduce pollution (externalities)
• Allows local businesses to survive
• Disadvantage of regulations:
• Less freedom
• Less competition among producers
• Less revenue
• Difficulty in implementation of regulation
8. Methods of Government Intervention
2. Financial intervention: use of taxes and subsidies.
• Government uses taxes and subsidies as a financial tools to
influence the production and price of the goods or services
in an economy.
• Tax: charges imposed by government on incomes, profits
and some types of consumer goods and services to fund
their expenditure.
▫ E.g. stamp duty, income tax, GST, service tax etc.
Tax / subsidy affects the supply curve (paid by producers)
Supply and demand don’t draw income tax
9. Methods of Government Intervention
2. Financial intervention: use of taxes and subsidies.
• Subsidies: a direct payment or grants by government
to producers, make the price paid by consumer less than
it should be.
▫ Subsidies goods and services that benefit community and
might not provide under free market.
▫ E.g. certain food, public transports, free school meals for
kids from low income families.
10. Methods of Government Intervention
3. Government provision / direct provision
• Government to take over the production of goods or
services, either in part or in whole.
• Supply the goods or services directly to customer free of
charge.
• State owned industries: electricity, water provision,
railways.
• Also applies to those industries supplied by both public
and private sectors: education, hospitals.
Editor's Notes
free market does not make the best use of scarce resources.
ME – no gov intervention, under production and under consumption of public goods
So there is necessity of gov to intervene
Casino entry age
Little or no taxpayer money, self regulate if strongly enforce
Can be ignored
