Government Intervention in Markets
Governments intervene in markets to try and overcome market failure. The
government may also seek to improve the distribution of resources (greater
equality). The aims of government intervention in markets include:
Stabilizing prices
Providing producers/farmers with a minimum income
To avoid excessive prices for goods with important social welfare
Discouraging demerit goods/encourage merit good
Forms of government intervention in markets:
Minimum prices
Maximum prices
Minimum wages
Nudges/Behavioral
unit
Minimum Pricing:
This involves the government setting lower prices.
The minimum price could be set for a few reasons:
Increase farmers’
incomes Increase
wages
Make demerit goods more expensive (Minimum price for alcohol has been established)
, A minimum price will lead to a surplus (Q3 – Q1). Therefore, the government will need to
buy the surplus and store it. Alternatively, it may impose quotas on farmers to decrease
the quantity of the good put onto the market.
Problems with minimum pricing:
It could be costly for the environment for the government to buy the surplus
A minimum price guarantee acts as an incentive for farmers to try and increase supply. As
an unintended consequence, the minimum price encourages more supply than expected
and the cost for the government rises. This happened with the EEC Common Agricultural
Policy.
To ensure minimum prices, the government may have to put tariffs on cheap imports –
which damages the welfare of farmers in other countries.
Maximum Price
This involves putting a limit on any increase in price (the price of housing rents cannot be higher
than
£300 per month)
Maximum prices may be appropriate in markets where:
Suppliers have monopoly power and are able to generate substantial economic rent
by charging high prices
The good is socially important – e.g. good quality housing is important to labour productivity
and a nations’ health.
Demand is price inelastic because the good is necessary for maintaining minimum standards
of living.
Governments intervene in markets to try and overcome market failure. The
government may also seek to improve the distribution of resources (greater
equality). The aims of government intervention in markets include:
Stabilizing prices
Providing producers/farmers with a minimum income
To avoid excessive prices for goods with important social welfare
Discouraging demerit goods/encourage merit good
Forms of government intervention in markets:
Minimum prices
Maximum prices
Minimum wages
Nudges/Behavioral
unit
Minimum Pricing:
This involves the government setting lower prices.
The minimum price could be set for a few reasons:
Increase farmers’
incomes Increase
wages
Make demerit goods more expensive (Minimum price for alcohol has been established)
, A minimum price will lead to a surplus (Q3 – Q1). Therefore, the government will need to
buy the surplus and store it. Alternatively, it may impose quotas on farmers to decrease
the quantity of the good put onto the market.
Problems with minimum pricing:
It could be costly for the environment for the government to buy the surplus
A minimum price guarantee acts as an incentive for farmers to try and increase supply. As
an unintended consequence, the minimum price encourages more supply than expected
and the cost for the government rises. This happened with the EEC Common Agricultural
Policy.
To ensure minimum prices, the government may have to put tariffs on cheap imports –
which damages the welfare of farmers in other countries.
Maximum Price
This involves putting a limit on any increase in price (the price of housing rents cannot be higher
than
£300 per month)
Maximum prices may be appropriate in markets where:
Suppliers have monopoly power and are able to generate substantial economic rent
by charging high prices
The good is socially important – e.g. good quality housing is important to labour productivity
and a nations’ health.
Demand is price inelastic because the good is necessary for maintaining minimum standards
of living.
