Analysing and Evaluating Government Intervention in Markets
- Levels: AS, A Level, IB
- Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC
This study note provides an overview of the different forms of government intervention in markets
What is laissez faire economics?
- In a free market system, governments take the view that markets are best suited to allocating scarce resources and allow the market forces of supply and demand to set prices.
- The role of the government is to protect property rights, uphold the rule of law and maintain the value of the currency.
- Competitive markets often deliver improvements in allocative, productive and dynamic efficiency
- But there are occasions when they fail – providing a case for intervention.
What are the main reasons for government intervention in markets?
The main reasons for policy intervention by the government are:
- To correct for market failures
- To achieve a more equitable distribution of income and wealth
- To improve the performance of the economy
| Type of Market Failure | Consequence of Market Failure | Example of Government Intervention |
| Factor immobility | Structural unemployment | State investment in education and training |
| Public goods | Failure of market to provide pure public goods, free rider problem | Government funded public goods for collective consumption |
| Demerit goods | Over consumption of products with negative externalities | Information campaigns, minimum age for consumption |
| Merit goods | Under consumption of products with positive externalities | Subsidies, information on private benefits |
| Imperfect information | Damaging consequences for consumers from poor choices | Statutory information / labeling |
| High relative poverty | Low income families suffer social exclusion, negative externalities | Taxation and welfare to redistribute income and wealth |
| Monopoly power in a market | Higher prices for consumers causes loss of allocative efficiency | Competition policy, measures to encourage new firms into a market |
Evaluating government intervention in markets
Revision presentation on indirect taxes as a form of government intervention
Revision presentation on subsidies as a form of government intervention
Revision presentation on maximum prices
Summary - evaluating government intervention in markets
- How significant is the market failure? (consequences)
- Can the market / price mechanism find some solutions?
- What are the likely consequences of not intervening?
- How effective is an intervention? (i.e. consider alternatives)
- Who are the winners / losers from an intervention?
- Consider the potential for one or more government failures
- Which works best – market-based or regulatory (“command and control”) approaches?
- What impact might behavioural interventions have?
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- Economics
- Study notes
- Market Failure
- Government Intervention
- Subsidies
- Maximum price
- Indirect Tax
- Direct Taxes
- Minimum price
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.
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