Government intervention in markets
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Government Intervention in Markets - PowerPoint PPT Presentation

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Government Intervention in Markets. Government Intervention in Markets. Working Time Directive. National Minimum Wage. National Minimum Wage. Wage Rate (£/per hour). S Lab. Min Wage. 4.90. Potential Unemployment.

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National Minimum Wage

Wage Rate (£/per hour)

S Lab

Min Wage




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

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

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


D Lab




No. Employed

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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.

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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.

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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)

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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??

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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??