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Government Intervention in Markets

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. 4.20. Potential Unemployment.

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Government Intervention in Markets

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  1. Government Intervention in Markets

  2. Government Intervention in Markets

  3. Working Time Directive

  4. National Minimum Wage

  5. National Minimum Wage Wage Rate (£/per hour) S Lab Min Wage 4.20 Potential Unemployment Demand for labour from employers falls, Supply of labour (employees) rises Government imposes a minimum wage above equilibrium at £4.20 per hour for those over the age of 22 Assume that the current equilibrium wage rate is £3.00 per hour which seen as being unacceptably low 3.00 D Lab 100 200 300 No’ Employed

  6. Government Failure

  7. 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

  8. 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

  9. 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)

  10. 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??

  11. 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 public actually wants – do we want a ban on smoking in public places??

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