Government Intervention to Correct Market Failure
- Remember, the reason for government intervention is to ensure that essential services are accessible to everyone, correct inequalities, and enhance overall societal welfare.
What are the different types of government intervention to correct market failure?
Using Taxes 💰
Governments use taxes to reduce negative externalities (unintended harmful effects) caused by certain goods and services. By taxing these goods, they make them more expensive and discourage their use, aiming to reduce the negative impacts on society.Example: The UK government imposed a tax on sugary drinks which is known as the ‘Soft Drinks Industry Levy’ to reduce sugar consumption and improve public health. It became effective in April 2018.👉 The below article found that the tax led to an 18% reduction in volume sales of levied brands due to the increased price that consumers had to pay (which therefore reduced demand!)
Providing Public and Merit Goods 🏥📚
Public goods (like street lighting) and merit goods (like healthcare and education) are often underprovided by the market because they are non-excludable and non-rivalrous or are unaffordable for many people.👉 Governments provide these goods to ensure everyone has access, thus correcting market failure by ensuring equitable provision and maximising societal benefits.
Examples:
- 🏴 Scotland: The Scottish Government provides free university tuition to ensure all students can access higher education.
- 🇺🇸 USA: Public libraries in the USA provide free access to books and internet services, promoting literacy and learning.
Legislation 📜
Governments pass laws to regulate activities that cause market failures, such as environmental regulations to reduce pollution.👉 This ensures that businesses and individuals act in ways that do not harm others, correcting the failure by aligning private actions with the public good.
Example: The Clean Air Act 1993 in the USA regulates air emissions from stationary and mobile sources to ensure air quality standards are met.
Quotas 📊
Quotas limit the amount of a certain good that can be produced or consumed, helping to control overuse and protect resources.👉 This intervention corrects market failure by preventing the depletion of natural resources and maintaining ecological balance.
Example: Fishing quotas in UK waters help prevent overfishing and protect marine ecosystems.
- In below article it mentions thatThe Common Fisheries Policy (CFP) set quotas on the amount of fish that could be caught to protect fish stocks.
- With Brexit, the UK's Trade and Cooperation Agreement with the EU includes specific quotas to gradually reduce EU fishing in UK waters, transferring a quarter of the EU's fishing rights to the UK fleet over five years.
Subsidies 💸
Governments provide financial assistance to encourage the production and consumption of goods with positive externalities, like renewable energy.👉 Subsidies correct market failures by making beneficial goods more affordable and widely available.
Example:Scottish Government's Broadband Subsidy: The R100 Scottish Broadband Voucher Scheme (SBVS) is a subsidy provided by the Scottish Government to people living in rural areas to enable broadband access.
- This initiative ensures that even the most remote areas have access to high-speed internet, promoting digital inclusion and economic development.
- “A subsidy of up to £5,000 is available to all eligible premises and covers all direct installation costs, which is carried out by a registered supplier.”
Maximum Price 📉
A maximum price is a fixed price (Price ceiling) created by the government usually set BELOW the equilibrium market priceSetting a maximum price ensures essential goods remain affordable for everyone, preventing prices from rising too high.
👉 This corrects market failure by protecting consumers from exploitation and ensuring access to basic necessities.
Example: The UK government has set a maximum price cap on energy bills to protect consumers from excessive charges.Let’s go through an example to see how that works:Note that the government is saying, "The price of energy bills is too high! We need to put a cap below what people are currently paying for their energy bills". This means setting a limit on how much can be charged for energy bills, ensuring it remains affordable.
- It is crucial to remember that this cap is set below the market price. This keeps the prices down to make essential goods and services more accessible.
Minimum Price 📈
A minimum price is a fixed price (price floor) created by the government usually set ABOVE the equilibrium market priceA minimum price ensures producers can cover their costs and maintain a fair income, preventing prices from dropping too low.
“MUP is not a tax, but a price floor, which means that price increases result in additional revenue to sellers and not the government”fraserofallander.org
👉 This intervention corrects market failure by ensuring sustainable production and fair wages.
Example: Scotland has implemented a minimum unit price for alcohol in 2018 to reduce excessive drinking and its associated harms.Let’s go through an example to see how that works:The government is saying “The price of alcohol is simply too low! We want to raise it by implementing a minimum price which will be above what the price of alcohol is currently is and then and legally prices cannot fall below that level!”
- It is crucial to remember that this cap is set ABOVE the market price. This keeps the prices up to discourage excessive alcohol consumption.
Privatisation 🏢
Privatisation involves transferring public sector assets to the private sector to increase efficiency and innovation.👉 This corrects market failure by introducing competition and improving service quality.
Example: The privatisation of British Telecom (BT) in the 1980s improved telecommunications services and expanded access.
- Since privatisation, BT has significantly increased its service coverage, benefiting millions of customers.
Deregulation 📈
Deregulation removes government controls to encourage competition and efficiency in the market.👉 This corrects market failure by reducing barriers to entry and promoting innovation.
Example: The deregulation of the airline industry in the late 1970s led to lower fares and increased air travel options.“Robust competition among airlines have driven fares to historic lows since deregulation — down almost 50% (adjusted for inflation).”
Regulatory Bodies 🏛️
Regulatory bodies enforce standards and rules to ensure markets operate fairly and efficiently.👉 This intervention corrects market failure by protecting consumers and promoting fair competition.
Example: In the UK, Ofgem regulates the electricity and gas markets to protect consumers and promote competition.There are other types of regulatory bodies:
Renationalisation 🏢
Renationalisation involves bringing previously privatised industries back under government control to ensure public interest and service quality.👉 This corrects market failure by prioritising public welfare over profit.
Example: The UK government renationalised the rail operator Northern Rail to improve reliability and service quality. Read more below 👇
However... government intervention isn't all free! 🚫💸
- Costs to Taxpayers: Government interventions often require funding from taxpayers' money to implement policies such as subsidies or infrastructure projects.
- Potential Market Distortions: Interventions can sometimes create market distortions (like excess supply and excess demand), leading to inefficiencies or unintended consequences.
- Administrative Burden: Implementing and managing interventions can be complex and require alot of oversight, which can be costly and time-consuming.