Government intervention in
markets
Should the government intervene in
markets and why?
• Discuss this in your group and attempt to note
an answer to this question, with a clear
justification.
• You could comment on public/private goods,
merit/demerit goods, market failure,
immobility of factors or distribution of income
and wealth
Reasons for government intervention
• In a free market, scarce resources are
allocated through the price mechanism
• Preferences and spending decisions come
together to determine equilibrium prices
• The free market works through price signals
• Demand high leads to expansion of supply
Reasons for government intervention
• To correct instances of market failure
• To achieve a more equitable distribution of
income and wealth
• To improve the performance of the UK
economy, both domestically and
internationally
Forms of Government Intervention
• Government legislation/regulation
• Use the passage on page 102 to create a mind
map of different forms of government
legislation/regulation – you might want to also
highlight where attempts at made at
remedying causes e.g. demerit goods &
tobacco
Direct provision of goods
• Royal Mail, Network Rail – state owned(ish)
• State funding of merit goods
• Why does the government fund these?
Financial intervention
• Use the 4 methods on page 103 to create a
mind map showing these methods –
paraphrase what is written there!
Intervention to close the information
gap
• Lack of information causes market failure
• Labelling cigarette packets with health
warnings
• Nutritional advice
• Advertising – speeding, drink driving
• Health screening/information campaigns
The effects of government
intervention
• Government intervention tends to create
winners and losers – on producers and
consumers
Public goods
• Providing public goods such as policing, street
lighting etc have a cost
• Paying for these is usually through taxation
• Progressive taxation (income tax, NI) are a
common way to raise revenue – earn more = pay
more
• Regressive taxation (VAT) impacts poorer people
more
• Can public goods be taxed on the benefits you
receive?
Externalities
• Regulation – e.g. chemicals polluting rivers; a
limit can be set and fines levied
• Pollution permits – using the market to solve
the problem; issuing or selling permits with
spare sold to other companies – needs
enforcing which can cost!
• Internalising external costs through taxation
• Encouraging production through subsidies
Fat Tax
Panorama