Http:// Copyright 2007 – Biz/ed Government Intervention in Markets.

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Copyright 2007 – Biz/ed

Government Intervention in Markets



Working Time Directive



National Minimum Wage



National Minimum WageWage Rate (£/per hour)

No. Employed

D Lab

S Lab

3.00

200

Assume that the current equilibrium wage rate is £3.00 per hour which is seen as being unacceptably low

4.90 Min Wage

Government imposes a minimum wage above equilibrium at £4.90 per hour for those over the age of 22

100 300

Demand for labour from employers falls, supply of labour (employees) rises

Potential Unemployment



Government Failure



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.



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.



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)



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??



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??

Http:// Copyright 2007 – Biz/ed Government Intervention in Markets.

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