3.7 GOVERNMENT POLICIES
The Government's Role
Markets can fail in a variety of different ways and the way a government acts obviously depends on why the market fails. Also, the government’s opinion on what type of role the government should play affects how governments intervene. Laissez faire economists see the free market as the best way of allocating scarce resources, and supply and demand should be allowed to set the price and quantities. They believe that the government should only be there to uphold law and order, protect property rights and to maintain a stable currency. They should only intervene in the market if the market has failed. Other economists argue that there is an extended role for governments.
Markets can fail in a variety of different ways and the way a government acts obviously depends on why the market fails. Also, the government’s opinion on what type of role the government should play affects how governments intervene. Laissez faire economists see the free market as the best way of allocating scarce resources, and supply and demand should be allowed to set the price and quantities. They believe that the government should only be there to uphold law and order, protect property rights and to maintain a stable currency. They should only intervene in the market if the market has failed. Other economists argue that there is an extended role for governments.
Why do Governments Intervene in the Market?
Governments intervene in markets for 3 reasons:
Governments intervene in markets for 3 reasons:
- Correct market failure. When a market fails the government should intervene and try to solve the situation. Markets can fail for a variety of reasons and the reason determines what the government policy should be.
- Achieve a more equitable distribution of income and wealth. Inequality is often viewed as a market failure and the introduction of progressive taxes that transfer money from the rich to the poor can reduce the level of inequality.
- Improve the performance of the economy. Governments should make sure that the economy is experiencing stable economic growth. They should not allow it to over-heat or to contract, as both over-heating and contracting will have an effect on the standards of living. Econ 2 explores how the government can manage the performance of the economy.
Types of Government Intervention
There are many different ways that the government can intervene in an economy. Some of these are:
There are many ways that the government can intervene in markets and the method that the government chooses will be dependent on the aims and the issues that the government is wishing to solve/ prevent.
There are many different ways that the government can intervene in an economy. Some of these are:
- Full public provisions. The government may feel as if the market is failing and they wish to provide this good or service. This will be the case for public good where there is a complete market failure and also the case for merit goods where the consumption is lower than the socially optimal level if left to the market. An example, of a merit good would be health care and education.
- Nationalisation. This is where the government takes over an industry and therefore become the owner. The government nationalised some of the banks after the financial crisis and there are called for them to do the same with rail providers.
- Privatisation. This is the opposite of nationalisation and is where the government sells off some of the businesses that they own. The most famous recent privatisation is Royal Mail.
- Taxes or subsidies. The government can places taxes or subsidies on goods that they wish to encourage/ discourage the consumption of.
- Information. The government may feel that providing economic agents with more information may be sufficient to solve the issues that they are trying to solve rather than taking a stronger action, such as introducing a tax. For example, all food must clearly show the nutritional information on the packaging. The idea is that if people understand what they are eating they may change their diets (others would disagree and instead say that taxing some foods would be a better option; the sugary drink tax).
- Price controls. These can either be a min price, where a price must be above a certain level. Alcohol could have a min price per unit and this would make cheap ciders more expensive meaning consumption would go down. Also, a min price is used for the minimum wage. Firms must pay workers £X per hour depending on their age. Some people argue that this creates real wage unemployment. Price floors (min prices) only work if the equilibrium price is below the min price. If the equilibrium price is above then there will be no effect.
- Regulation. This is the creation of laws to prevent economic agents undertaking certain actions. The banking industry is very heavily regulated in order to ensure that the economy is financially stable. After the financial crisis of 2007/08 some are calling for even more regulation from the government to ensure that another financial crisis does not occur. Another example is that under 18’s are not able to buy alcohol and school children must remain is education until they are 18.
There are many ways that the government can intervene in markets and the method that the government chooses will be dependent on the aims and the issues that the government is wishing to solve/ prevent.