Government Intervention to Address Market Failure (Cambridge (CIE) O Level Economics)

Some consumers benefit as they purchase at lower prices

They can stabilise markets in the short-term during periods of intense disruption e.g. Covid supplies at the start of the pandemic

 Some consumers are unable to purchase due to the shortage

The unmet demand usually encourages the creation of illegal markets (black/grey markets) as desperate buyers turn to illegal bidding

Maximum prices distort market forces and therefore can result in an inefficient allocation of scarce resources e.g. maximum prices in rentals in the property market create a shortage

In agricultural markets, producers benefit as they receive a higher price (Governments will often purchase the excess supply & store it or export it) 

When used in demerit markets, output falls (Governments will not purchase the excess supply of a demerit good) 

Producers usually lower their output in the market to match the QD at the minimum price & this helps to reduce the external costs

It costs the government to purchase the excess supply & an opportunity cost is involved

Farmers may become over-dependent on the Government's help

Producers lower output which may result in an increase in unemployment in the industry

Guarantees a minimum income for the lowest paid workers

Higher income levels help to increase consumption in the economy

May incentivise workers to be more productive

Raises the costs of production for firms who may respond by raising the price of goods/services

If firms are unable to raise their prices, the introduction of a minimum wage may force them to lay off some workers (increase unemployment)

Reduces the quantity demanded of demerit goods

Raises revenue for government programs

The effectiveness of the tax in reducing the use of demerit goods depends on the price elasticity of demand (PED)

• Many consumers who purchase products that are price inelastic in demand will continue to do so

It may help create illegal markets as consumers seek to avoid paying the taxes

Producers may be forced to lay off some workers as output falls due to the higher prices

Can be targeted to helping specific industries

Lowers prices & increases demand for merit goods

Helps to change destructive consumer behaviour over a longer period of time e.g. subsidising electric cars makes them affordable and helps motorists to see them as an option for the masses - & not just the elite

Distorts the allocation of resources in markets e.g. it often results in excess supply when used in agricultural markets

There is an opportunity cost associated with the government expenditure - could the money have been better used elsewhere?

Subsidies are prone to political pressure & lobbying by powerful business interests e.g. most oil companies receive subsidies from their respective governments (despite making $billions in profits each year)

Public goods are beneficial for society & are not provided by private firms due to the free rider problem

Examples include roads, parks, lighthouses, national defence

They are usually provided free at the point of consumption

Accessible to everyone regardless of income

Usually provide both private & external benefits to society

Paid for through general taxation

There is an opportunity cost associated with their provision

Products which are free may result in excess demand & long waiting times e.g. procedures at Public hospitals

Privatisation occurs when governments transfer ownership & control of firms/assets from the State (public sector) to the private sector (private firms)

Many State firms are monopolies. By privatising them it encourages more competition in those markets

This should result in more efficiency & lower prices for consumers

Increases government revenue in the year the asset is sold

Private firms may run the business more efficiently

The government no longer needs to manage the business or hire people to work for it - this reduces government expenditure

Government assets are often sold well below their actual market value

Private firms often provide a sub standard good/service as they cut quality to increase profits

The price of the good/service usually increases as firms seek to maximise their profit e.g. energy prices in the UK market

Many privatised companies still maintain considerable market power & have to be regulated, e.g. water companies

Nationalisation occurs when the Government takes control & ownership of firms which were in the private sector

This can generate efficiencies, especially when delivering utilities (gas, water, electricity) to the national population

It creates more equity in society as all citizens have the same access to the same resource at the same price e.g. Norway nationalised much of the oil industry when oil was first discovered in 1972. The profits belong to the citizens

The business can generate significant revenue for government

Government firms can often run very inefficiently

There is an opportunity cost associated with the money required to run it

The Government may lack the expertise to run the business

Governments create rules to limit harm from the external costs of consumption/production

They often create regulatory agencies to monitor that the rules are not broken

Individuals or firms may be fined/imprisoned for breaking the rules e.g. selling cigarettes to minors is a punishable offence

They help to reduce the external costs of demerit goods

Fines can generate extra government revenue

Enforcing laws requires the government to hire more people to work for the regulatory agencies

Enforcing laws can be difficult as it is a complex process to determine if firms/consumers are breaking the laws

The regulation may create underground (illegal) markets which could generate even higher external costs on society