Government Intervention In Markets
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http://www.bized.ac.uk
Government Intervention in Markets
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Intervention in Markets
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Working Time Directive
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
National Minimum Wage
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
National Minimum Wage Wage Rate (£/per hour)
S Lab Min Wage
4.90
3.00
Government Assume that the Demand for imposes a current from labour minimum wage equilibrium wage employers above rate is equilibrium £3.00 per falls, supply at £4.90 perishour hour which for those over seen as being of labour the age of 22 low unacceptably (employees)
Potential Unemployment
rises D Lab 100
200
300
No. Employed Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Failure
Copyright 2005 – Biz/ed
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Government Failure • Distortion of Markets: – Price ceases to act as a signal for resource allocation – Tendency for shortages and surpluses to exist in the long run – Difficult for people to make informed choices based on cost, value, etc.
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Failure • Distortion of Incentives: – Income taxes – distort incentives to work – Business taxes – stifle initiative, investment and enterprise – May encourage ‘underground markets’ – smuggling, forgeries, etc.
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Failure • Rent Seeking and Log Rolling
– Consequence of having to make choices – Results from lobbying – often powerful sectors of the economy – Concessions or decisions made to provide one good or service at the expense of another – Chosen good may not be in interests of all but only to a minority who have a powerful influence over decision makers
– (See James M. Buchanan (Nobel Prize winner) and Gordon Tullock – Public Choice Theory)
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Failure • Administrative Cost: – High levels of bureaucracy – e.g. cost of administering CAP and farm support scheme is huge!
• Conflicting Objectives: – e.g. reducing smoking and beneficial effects on health and welfare against rights of people to do as they please and tax revenue – Governments do not always know what is best for us – e.g. are the policies on illegal drugs/prostitution/pornography, etc. the right ones??
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Failure • Inadequate Information: – Knowing the consequences of the policy (e.g. building new motorways) – Knowing the effect on other markets (e.g. steel tariffs in USA) – Lack of knowledge on costs and benefits – private costs – possibly yes; social costs??? – Lack of knowledge about what the public actually wants – do we want a ban on smoking in public places?? Copyright 2005 – Biz/ed
Government Intervention in Markets
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Intervention in Markets
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Working Time Directive
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
National Minimum Wage
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
National Minimum Wage Wage Rate (£/per hour)
S Lab Min Wage
4.90
3.00
Government Assume that the Demand for imposes a current from labour minimum wage equilibrium wage employers above rate is equilibrium £3.00 per falls, supply at £4.90 perishour hour which for those over seen as being of labour the age of 22 low unacceptably (employees)
Potential Unemployment
rises D Lab 100
200
300
No. Employed Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Failure
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Failure • Distortion of Markets: – Price ceases to act as a signal for resource allocation – Tendency for shortages and surpluses to exist in the long run – Difficult for people to make informed choices based on cost, value, etc.
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Failure • Distortion of Incentives: – Income taxes – distort incentives to work – Business taxes – stifle initiative, investment and enterprise – May encourage ‘underground markets’ – smuggling, forgeries, etc.
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Failure • Rent Seeking and Log Rolling
– Consequence of having to make choices – Results from lobbying – often powerful sectors of the economy – Concessions or decisions made to provide one good or service at the expense of another – Chosen good may not be in interests of all but only to a minority who have a powerful influence over decision makers
– (See James M. Buchanan (Nobel Prize winner) and Gordon Tullock – Public Choice Theory)
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Failure • Administrative Cost: – High levels of bureaucracy – e.g. cost of administering CAP and farm support scheme is huge!
• Conflicting Objectives: – e.g. reducing smoking and beneficial effects on health and welfare against rights of people to do as they please and tax revenue – Governments do not always know what is best for us – e.g. are the policies on illegal drugs/prostitution/pornography, etc. the right ones??
Copyright 2005 – Biz/ed
http://www.bized.ac.uk
Government Failure • Inadequate Information: – Knowing the consequences of the policy (e.g. building new motorways) – Knowing the effect on other markets (e.g. steel tariffs in USA) – Lack of knowledge on costs and benefits – private costs – possibly yes; social costs??? – Lack of knowledge about what the public actually wants – do we want a ban on smoking in public places?? Copyright 2005 – Biz/ed
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