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Study notes

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

Evaluating government intervention - revision video
Government intervention

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:

  1. To correct for market failures
  2. To achieve a more equitable distribution of income and wealth
  3. 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

Indirect taxes - revision video

Revision presentation on subsidies as a form of government intervention

Producer subsidies - revision video

Revision presentation on maximum prices

Maximum prices - revision video

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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