Market Intervention
Learning outcomes

By studying this section students will
be able to:
• evaluate the benefits of the free market
• evaluate the problems of the free
market
• understand the methods of market
intervention
• justify market intervention
• understand recent developments in
public sector provision
The free market

The benefits of free markets
• “the market knows best.”
• economic efficiency

Having maximum output for minimum input.
Profit maximization.
• allocative efficiency

•
Trade-off between producing one product,
instead of another what product is best for
firms?
The free market

The benefits of free markets
• consumer sovereignty

Demand of consumers leads more
production in some products.
• economic growth

Firms competeproductivitybetter use of
resourceseconomic growth
The free market

Criticisms of the market solution
• the inappropriateness of the perfect market
assumption
• externalities*


Overproduced Pollutions
Violent Games crime
• public goods*

Traffic lights//signposts for tourists
• realities of economic growth


Ups and downs are normal in economic life cycle//
No sustainability
• equity


Having gap between the rich and the poor
Those can access to resources( $; education) and those who
can’t
Market intervention

central planning
• Production decisions by government
(China/Singapore)

control of monopolies and mergers
• Control mergers,

because mergers  more monopoly
List of airline mergers and
acquisitions

Air West
• 1968 - Pacific Air Lines (originally Southwest
Airways), Bonanza Air Lines, and West Coast
Airlines merged to form Air West
• 1970 - Howard Hughes purchased Air West
and renamed it Hughes Airwest

American Airlines
• 1987 - American Airlines purchased Air
California
• 2001 - American Airlines purchased TWA
List of airline mergers and
acquisitions

Delta Air Lines
• 1924 - Started as Huff Daland Dusters
• 1928 - Huff Daland Dusters was purchased by C.E. Woolman
and renamed Delta Air Service after the Mississippi Delta
• 1953 - Purchased the Chicago and Southern Air Lines, and
flew under the name Delta C&S for the next two years
• 1972 - Purchased Northeast Airlines
• 1987 - Merged with Western Airlines
• 1991 - Purchase of Pan Am's European routes, and acquired
Pan Am's shuttle, forming what is today Delta Shuttle
• 1991 - Purchased Eastern Airlines
• 1996 - Delta Express began service, ended November 2003
• 2003 - Song began service, ended May 2006
• 2008 - Completed merger with Northwest Airlines. Became the
world's largest carrier by passenger traffic (to keep Delta
name)
List of airline mergers and
acquisitions

Northwest Airlines
• 1916 - Founded by Col. Lewis Patenaude, under the name
Northwest Airways
• 1927 - Began flying passengers
• 1949 - With its new routes to the far east, re-branded itself as
Northwest Orient Airlines
• 1986 - Purchased Republic Airlines, and dropped the word
Orient from its brand name
• 2008 - Merged with Delta to form the world's largest carrier.
Currently a subsidiary of Delta Air Lines, Inc. Combined carrier
will use the Delta name.
Market intervention

laws, planning controls and permits
• Some goods and services may be banned.


Additive drugs// prostitutions
taxes and subsidies
• Taxes on luxurious products
• Subsidies on price of rice

public provision
• Public ownerships of corporations


Electricity Generating Authority of Thailand
Metropolitan Waterworks Authority
Monopolies

Are these
passengers being
ripped off?
• Probably

Why?
• Many ferries operate
in near-monopoly
conditions. So they
may pay high prices
for tickets and
certainly will for onboard catering
Problems of market intervention

Resource allocation in disequilibrium
• Ineffective resource allocation by governments
• Can be heavily allocated in some areas (e.g.
More in big cities)

Public ownership: efficiency and culture
• Leading to waste and poor quality of service
(mostly no competition)

Side-effects of subsidies and taxes
• Higher taxes reducing incentives in economy
Problems of market intervention

Loss of consumer sovereignty
• Power of consumers in spending is reduced by
income taxes.

Measurement of external (or social)costs
and benefits
• Difficult to measure social cost

Government interference and changing
objectives
• Inconsistence in government policy.
• No more “Kitchen of the world policy”
Public or Private?

What are the pros
and cons of public
ownership of
railways?
Trends in public sector provision

Less central planning
• Even government needs to be more
flexible and competitive.

More privatization
• Should we privatize energy
organizations?

Performance targets and indicators
• Need to have clear and measurable
targets and indicators.
The End