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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 wage5
National Minimum Wage

Wage Rate (£/per hour)

S Lab

Min Wage

4.90

Potential

Unemployment

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

3.00

D Lab

100

200

300

No. Employed

government failure7
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 failure8
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 failure9
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 failure10
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 failure11
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??