9. Types of intervention
• When asked to write about government
intervention in markets – remember
1) Why is the intervention justified?
2) Can you use a diagram to show the effects?
3) Consider in your evaluation:
a) Effectiveness of a policy
b) Does a policy improve economic efficiency?
c) Are there equity issues? (e.g. fairness)
d) Are there possibilities for government failure?
10. Regulation of Consumer
Real world
example
Which market
failure?
Key aims Risk of
government
failure
Tanning Salons
Drinking Laws
Information
failure
De-merit goods
Lower demand
Adjust perceived
private benefits
Compliance
costs
Dangers of
paternalism
11. Regulation of Producer
Real world
example
Which market
failure?
Key aims Risk of
government
failure
Equal pay act
Maximum C02
emissions for
vehicles
Inequality /
discrimination
Externalities /
climate change
Reduce
exploitation
Lower emissions
Compliance
costs
Extra red tape
for business
12. Indirect tax on producer
Real world
example
Which market
failure?
Key aims Risk of
government
failure
Tax on aviation
fuel
Carbon tax on
businesses
Externalities
Climate change
Internalise
externalities
Incentives to
control pollution
Who pays the
tax?
Unintended
consequences
13. Charge on consumer
Real world
example
Which market
failure?
Key aims Risk of
government
failure
Congestion
charge
Prescription
charges
Externalities
Information
failures
Avoiding over-
consumption
Making better
use of scarce
resources
Unintended
consequences
Costs of
collection
Equity concerns
14. Producer subsidy
Real world
example
Which market
failure?
Key aims Risk of
government
failure
Bail outs for
banks
Wage subsidy in
a recession
Market failures
from
unemployment
Promoting
consumption of
merit goods
Positive
externalities
Lowering prices
and costs
Increasing
demand
Promoting jobs
and
competitiveness
Trade effects
Distortion of the
market
Opportunity
costs of bail outs
Moral hazard
from supporting
businesses that
have failed
15. Consumer subsidy
Real world
example
Which market
failure?
Key aims Risk of
government
failure
Car scrappage
scheme
Subsidy for
installing solar
panels
Merit goods
Imperfect
information
Poverty and
inequality
Lower prices
and provide
incentive to buy
Create new
demand and
jobs
Similar to
producer
subsidies
Low elasticity of
demand
Rising demand
for imports
Environmental
concerns
16. Import tariff
Real world
example
Which market
failure?
Key aims Risk of
government
failure
Tariff on
Chinese shoes
Structural
unemployment
in industries
affected
Change the
pattern of
demand
Protect jobs
Retaliation
Higher prices hit
consumers
Distorts markets
17. Maximum price
Real world
example
Which market
failure?
Key aims Risk of
government
failure
Price capping for
roaming charges
on mobile
phones
Exploitation of
monopoly power
Lower prices for
consumers –
especially for
those travelling
abroad
Capped prices –
operators will
raise prices
elsewhere to
compensate
18. Minimum price
Real world
example
Which market
failure?
Key aims Risk of
government
failure
Minimum wage Exploitation of
lower paid
workers in the
labour market
Wage floor – a
decent wage
Boost living
standards of the
lowest paid
workers
Incentive to look
for work
Possible risk of
higher
unemployment
Costs of
compliance
28. Improve your evaluation
• Discussing costs and benefits to producers and consumers
• Negative or positive interventions?
• Thinking about short and longer-term effects of a policy
• Be aware of value judgements
• The law of unintended consequences
• Remember the costs of intervention can large!
• Importance of combinations of policies
• Can freely-functioning markets find their own solution to a
problem?
