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This study note provides an overview of the different forms of government intervention in markets

Laissez faire economics

  • In a free market system, governments take the view that markets are best suited to allocating scarce resources and allow the market forces of supply and demand to set prices.
  • The role of the government is to protect property rights, uphold the rule of law and maintain the value of the currency.
  • Competitive markets often deliver improvements in allocative, productive and dynamic efficiency
  • But there are occasions when they fail – providing a case for intervention.

Intervention in the market

The main reasons for policy intervention are:

  1. To correct for market failure
  2. To achieve a more equitable distribution of income and wealth
  3. To improve the performance of the economy

Type of Market Failure

Consequence of Market Failure

Example of Government Intervention

Factor immobility

Structural unemployment

State investment in education and training

Public goods

Failure of market to provide pure public goods, free rider problem

Government funded public goods for collective consumption

Demerit goods

Over consumption of products with negative externalities

Information campaigns, minimum age for consumption

Merit goods

Under consumption of products with positive externalities

Subsidies, information on private benefits

Imperfect information

Damaging consequences for consumers from poor choices

Statutory information / labeling

High relative poverty

Low income families suffer social exclusion, negative externalities

Taxation and welfare to redistribute income and wealth

Monopoly power in a market

Higher prices for consumers causes loss of allocative efficiency

Competition policy, measures to encourage new firms into a market

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