Economics
Government Intervention in the Market
Government intervention in the market refers to actions taken by the government to influence the functioning of markets. This can include policies such as taxation, subsidies, price controls, and regulations aimed at correcting market failures, promoting competition, or addressing social and economic objectives. Government intervention can impact the allocation of resources, distribution of income, and overall economic efficiency.
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8 Key excerpts on "Government Intervention in the Market"
eBook - ePubMicroeconomic Principles and Problems
A Pluralist Introduction
- Geoffrey Schneider(Author)
- 2024(Publication Date)
- Routledge(Publisher)
PART V Government intervention in microeconomic markets DOI: 10.4324/9781003368441-23 Part V focuses on the myriad roles that government policy plays in microeconomic markets. An economic system is a human creation, and governments set the rules of the game, determining which types of economic activities are acceptable and which types are not. Will we allow child labor to make our products, or should our government prevent such activities? How much leeway should firms have when it comes to polluting the environment? And so on. Thus, the degree and type of government intervention in microeconomic markets is a fundamental characteristic of an economic system. As an example, consider Chapter 19, which takes up market failure and government failure. Left to their own devices, capitalist markets exhibit a number of destructive market failures. Firms sometimes produce unsafe products such as tainted meat. Workers can be exploited and markets can generate inequality and poverty. Huge firms can dominate markets and ruin the environment. Solving these problems requires carefully designed government policy. Yet, sometimes the government can create problems when it intervenes, resulting in government failure. Chapter 20 takes up the economics of the environment and climate change. Ecological economists take a political economy approach to the study of the environment and view the economic system as situated within a natural environment. We ignore the natural environment at our peril. Environmental economists take a mainstream economics approach and focus more narrowly on the optimal level of pollution abatement using cost–benefit analysis. Both ecological and environmental economists advocate policies to reduce greenhouse gas emissions, such as a carbon tax or a cap-and-trade system
Available until 5 Dec |Learn moreEconomic Principles and Problems
A Pluralist Introduction
- Geoffrey Schneider(Author)
- 2021(Publication Date)
- Routledge(Publisher)
Part V Government intervention in microeconomic markets DOI: 10.4324/9781315636924-23 Part V focuses on the myriad roles that government policy plays in microeconomic markets. An economic system is a human creation, and governments set the rules of the game, determining which types of economic activities are acceptable and which types are not. Will we allow child labor to make our products, or should our government prevent such activities? How much leeway should firms have when it comes to polluting the environment? And so on. Thus, the degree and type of government intervention in microeconomic markets is a fundamental characteristic of an economic system. As an example, consider Chapter 19, which takes up market failure and government failure. Left to their own devices, capitalist markets exhibit a number of destructive market failures. Firms sometimes produce unsafe products such as tainted meat. Workers can be exploited and markets can generate inequality and poverty. Huge firms can dominate markets and ruin the environment. Solving these problems requires carefully designed government policy. Yet, sometimes the government can create problems when it intervenes, resulting in government failure. Chapter 20 takes up the economics of the environment and climate change. Ecological economists take a political economy approach to the study of the environment and view the economic system as situated within a natural environment. We ignore the natural environment at our peril. Environmental economists take a mainstream economics approach and focus more narrowly on the optimal level of pollution abatement using cost–benefit analysis. Both ecological and environmental economists advocate policies to reduce greenhouse gas emissions, such as a carbon tax or a cap-and-trade system
eBook - PDF- H. Blomqvist, M. Lundahl(Authors)
- 2002(Publication Date)
- Palgrave Macmillan(Publisher)
Distortions of the economy, the main theme of the present work, refer precisely to deviations from Pareto optimality. Central to our theme is the question of whether a given intervention moves the economy towards Pareto optimality or instead creates a distor- Welfare, Government Intervention and Political Economy 3 tion. As we will demonstrate later, under certain conditions Pareto optim- ality will result if all markets in the economy are characterized by perfect compe- tition. This is nothing but Adam Smith's idea about the `invisible hand'. When the individual actors in the economy try to maximize their own utility, as a by-product utility for society as a whole will also be maximized. The ability of the market to coordinate the economic activities, however, has its limitations. In such cases there are reasons for the government to interfere. Sometimes, however, the state also intervenes when there are no problems with the functioning of the market. Behind the latter type of interventions different kinds of special interests are often to be found. Interventions may also be made in order to increase national welfare at the expense of the rest of the world. Distortions and government interventions If the market system handles the allocation of resources efficiently, should the government not avoid getting involved and instead concentrate on redistributions of income and wealth that are perceived as `fair'? The answer is not given. There are two problems in this context. In the first place it is in practice difficult to redistribute income and wealth without affecting the resource allocation. Second, the operation of the market system is optimal only if there is perfect competition, including the absence of externalities (cf. below) and economies of scale. If not, distortions have already been built into the functioning of the markets, which in turn provides a rationale for government intervention.
- C. Peláez(Author)
- 2015(Publication Date)
- Palgrave Macmillan(Publisher)
Moreover, the public interest view predicts that government intervention occurs in response to market failures. There are two classical cases of market failure in “neoclassical economics.” 6 There could be positive or negative externalities in pro- duction. A second set of market failures originates in the occurrence Government Intervention and Finance 9 of “market power,” as, for example, the existence of only one source of spring water in a community, such that the owner can set the price to obtain excess profits. There is a negative externality or nuisance when the output of one factory increases the cost of another factory. Suppose there is a laundry shop in a community that dries the clothing with the heat of the sun. A new steel factory is then established such that its pollution soils the laundry. In this case Marginal cost of steel producer = private marginal cost < marginal social cost = marginal cost of steel producer plus cost of pollution The decision of the polluter ignores the cost of pollution. The solution is a per unit tax on the price of steel to make output lower, correspond- ing to marginal social cost. The production of greenhouse gases is an externality of modern economic activity that pollutes the atmosphere, causing potential global warming with harmful effects. The proposed solution is a price of carbon to reduce output to slow the increase in the stock of greenhouse gases. There is a positive externality when the output of one good or service reduces the cost of others. Education increases the efficiency of most other economic activities, lowering their costs. However, education pro- vided by a free market without government intervention may not be sufficient for attaining Pareto optimality. Intervention could be in the form of a subsidy to increase education to the socially desirable level. In the case of market power, output is lower than under perfect com- petition because price exceeds marginal cost.
eBook - PDFMicroeconomics
Private and Public Choice
- James Gwartney, Richard Stroup, Russell Sobel, David Macpherson(Authors)
- 2017(Publication Date)
- Cengage Learning EMEA(Publisher)
6-7 THE ECONOMIC WAY OF THINKING ABOUT MARKETS AND GOVERNMENT When analyzing the operation of markets and government, it is vitally important to keep two points in mind. First, the government’s protective role provides the foundation for the smooth operation of markets. A government that protects private property, enforces contracts evenhandedly, maintains monetary stability, and refrains from regulations that restrict entry into markets is central to the efficient operation of markets. Second, both the market and the political process have shortcomings. As explained in Chapter 5, economic analysis indicates that there are cases where markets will fail to allocate resources efficiently. However, as the analysis of this chapter indicates, there are also reasons the political process will lead to the inefficient allocation of resources. There is government failure as well as market failure. As in the case of market failure, govern- ment failure reflects the situation where the structure of incentives encourages individuals to engage in counterproductive rather than productive use of resources. The accompanying Thumbnail Sketch lists the major sources of both market failure and government failure. There is a tendency to idealize democratic governance—to focus on the stated objectives of political officials rather than the actual effects of their policies. Public-choice analysis warns against this naïve view. It focuses on how the political process really works, even if that is not how we might like for it to work. Public-choice analysis also indicates that the presence of government failure will grow as government becomes larger and more intrusive. A larger government will mean more grants, contracts, subsidies, and regulatory favors. This will create more special interest spending, rent-seeking, and crony capitalism.
eBook - PDF- Bernadette Andreosso-O'Callaghan(Author)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
In the developing world, intervention helps lessen the perceived (and real) instability of international markets for agricultural commod- ities. For example, rice has traditionally represented a high percentage of export earnings in countries such as Thailand. Since rice is also the main staple for consumption, and since the rice market is very unstable at the world level, the Thai government has tried to insulate the domestic market from world fluctuations, through the taxation of rice exports (Colman and Young, 1993). In developing countries, importables are normally protected (Krueger et al., 1988). Moreover, and as we have seen in Chapter 2, supply and demand char- acteristics prevailing in agricultural markets make the agricultural sector different from other industries or sectors in any economic system. The high unpredictability of supply, due to weather conditions and to biological developments, makes intervention desirable. In the case of the EU, economic considerations explain nevertheless only partly why governments intervene on behalf of agriculture. There are non-economic 66 The Economics of European Agriculture Government Intervention in Agriculture 67 arguments that reinforce the ‘specific’ nature of agriculture; indeed, socio-political as well as strategic considerations also play an important role in shaping agricultural policies. From a socio-political point of view, farmers in Europe used to form a cohesive and large social class that con- veyed traditional moral values. When the Common Market was formed in the second half of the 1950s, farmers represented 39 and 32 per cent of total employment in Italy and France respectively. This relatively large and conservative class was instrumental in keeping the communist threat away from post-war Western Europe. For example, the ‘vote paysan’ in France was an important contributory force in the re-election of several right-wing governments and Presidents until the Presidential election of 1981.
eBook - PDF- Wyn Grant(Author)
- 2017(Publication Date)
- Red Globe Press(Publisher)
In order to assess these concerns, it is necessary to consider in more depth the issues of market failure and government failure. Market failure Market failure is perhaps an unduly dramatic term as it suggests some type of catastrophic collapse. In fact reference is being made to a sub-optimal outcome that may be capable of remedy. In general what is being talked about is a situation in which a competitive market made up of agents pursuing their self-interest leads to an outcome that is judged socially inefficient. In particular, this refers 68 Economic Policy in Britain to allocative inefficiency. This covers both what is known as X-inefficiency which might be regarded as what we conventionally regard as efficiency (the production of a good or service using the minimum of inputs), but also 'whether the commodity concerned meets the wants of its consumers as effectively as possible' (Le Grand, 1991, p. 425). The problem of market failure can be analysed in terms of the assumptions and language of economics or a broader moral and social critique. First we shall discuss five common market failures discussed in the economics literature. This is not an exhaustive list, but it covers the most important cases. First, there is a monopoly and the conse-quent absence of competition. Market domination allows the mon-opolist to set a monopoly price to the disadvantage of consumers. The policy response to this has been to develop a competition policy that seeks to break up monopolies or prevent their formation. Such policies have enjoyed variable success (see Chapter 6). A special subset of monopoly is the natural monopoly where it is claimed that the most efficient outcome is secured by having only one producer. This was the classic justification of public-utility national-ization where it was argued that duplicating transmission systems was manifestly inefficient.
eBook - PDF- David Stager(Author)
- 2013(Publication Date)
- Butterworth-Heinemann(Publisher)
Another argument is that governments need to have direct control over vital services such as defence, and police and fire protection. These have been government functions for so long that it is impossible for some people to imagine them being arranged privately. Yet fire protec-tion was provided privately in some parts of Canada during the last cen-tury by the fire insurance companies, and some aspects of police service are available privately through firms providing security guards and pri-vate detectives. There are, in fact, a number of alternative arrange-ments open to governments for the provision of most services now appearing in pubHc budgets. Purchases Another alternative is to purchase the goods or services from the private sector or from other governments, instead of producing them directly. The federal government, for example, currently buys student places in educational institutions to provide further training for people who qualify under the National Training Act. Under a previous technical training act, the federal government participated jointly with the prov- Government in ttie Mari^et Economy 73 Using tlie Price Meclianism for Pubiic Policies Governments can attempt to correct the perceived failures of the market system in several ways. One common method is through the price mech-anism. Examples are the setting of maximum or minimum prices and the taxing or subsidizing of particular commodities. Some existing or proposed public policies are examined here to illustrate the effects of government intervention and the significance of supply and demand elasticities in designing a policy that will have the desired results. Rent Controis: An Exampie of Ceiiing Prices A common proposal for increasing the real incomes of persons living in rented apartments is to set maximum rental rates, thus leaving these persons a larger portion of their incomes to spend on other goods and services. The general consequences of such a policy are illustrated by Figure 4.1.
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