2 Content Market failure and government failure Competition policy Public ownership, privatisation, regulation and deregulation of marketsNotions of equityThe problem of povertyGovernment policies to alleviate poverty and to influence the distribution of income and wealthCost Benefit Analysis
3 Market Failure Markets fail for a number of reasons: Externalities (social costs and social benefits)MonopoliesImperfect informationFactor immobilityDue to equity issues – where there is a disparity between resource allocation
4 Government FailureThis occurs when government interventions either increase the severity of market failure or cause a new failure to ariseThis occurs when policies:Have damaging long term consequencesAre ineffectiveCause more problems than solve problems
5 Methods of Government Intervention TaxationSubsidiesBuffer StocksPollution permitsState provisionRegulationExtending property rights
6 Extending Property Rights Extending property rights is a method the government can use of internalizing the externality.The aim of extending property rights is to reduce the impact of the externality
7 Advantages and Disadvantages of Extending Property Rights The government doesn’t have to assess the value of property as the owners are in a better position to do thisThere will be a direct transfer of resources from the polluters to those who suffer – the firms who pollute will have to bear the negative effectsDisadvantages:It can be difficult - governments may not have the ability to extend property rights especially overseasExtending property rights within a country can be difficult if the link between the pollution and the problem is unclearIts often difficult for the owner of the property to assess its value to them
8 Causes of market failure Inadequate information this may result from:Not doing a cost benefit analysisInsufficient information on long term costs / benefitsConflicting objectives:Governments tend to think in the short term rather than the long term therefore fail to consider long term costs / benefitsIf governments control an industry they may be more concerned with their interests than those of the publicIf the policy interventions lead to negative consequences for consumers / producers e.g. higher income tax
9 Causes of market failure Administration costs – these may be too high to reap the benefits of the interventionPolitical self interest – politicians may do what is best for them thereby resulting in inefficient resource allocations
10 Regulatory CaptureRegulatory capture this is where a government regulatory agency who are meant to be acting in the public interest instead becomes dominated by the interests of the existing firms in the industry it is meant to be overseeingRegulatory capture arises from the fact that the current firms have a stake in the outcomes of political decisions therefore ensuring they find a way to influence decision makers
11 Market Failure And Government Failure The marginalist model of externalities is used to explain why externalities result in a misallocation of resourcesThis model looks at marginal social costs and social benefits to enable resource allocation to be efficientBy looking at marginal social costs and benefits the government can decide how to impact supply and demand for a specific product decreasing the marginal benefits.
12 Government policy and the environment Environmental change impacts economic behaviorThere is increasing pressure on the government to consider environmental factorsThe environment is often damaged by negative externalities caused by consumption and production
13 Competition PolicyEU and UK competition policies have the following aims:To increase consumer choiceTo ensure effective price competition between firmsTo help ignite technological innovationsTo investigate anti competitive behaviour which can have a negative impact on consumers
14 Competition Policy In the UK competition policy looks at: Control of mergers and takeoversThe issues of antitrust and cartel formationMarket liberalisationState aid control
15 Competition Policy - Office of fair trading The office of fair trading (OFT) ensures that consumers are getting the right prices for productsThis is to monitor anti-business practices and consumers are protected.
16 Monopolies and merger competition (M. M Monopolies and merger competition (M.M.C) and the competition commissionIf the OFT has reasonable intelligence to find that a business is being anti-competitive (e.g. charging high prices or restricting consumer choices), the OFT will report those businesses to the Monopolies and merger competition (M.M.C) or the competition commission.MMC investigate if businesses will create unfair competition by taking over companies.Competition commission will investigate if businesses are acting unethically such as charging high prices.
17 PunishmentThe OFT, MMC and the competition commission are likely to investigate businesses with a market share of over 25%.If businesses are found guilty of anti-competitive behaviour they can be:Fined 25% of all profits being made.Of they have to give their market share to other businesses that were affected.
18 EU Competition Policy EU competition policy looks at Restrictive practicesAbuse of dominant market power.This legislation deals with anti competitive behaviorThe EU has the power to punish anti competitive behavior even if there is no formal agreement to act in an anti competitive mannerPenalties include them taking 10% of the firms turnoverSome behaviors including market sharing and exclusive marketing can be exempt if they increase either consumer benefits or technical progress
19 Competition Policy - Costs and Benefits of Policies Administration costs in implementing the policyCan be expensive and time consuming to enforceBenefitsProtects consumers from unfair practicesEncourages and enhances fair competition
20 Competition Policy – Real World Examples The takeover of Safeway by Morrisons was investigated to ensure that no unlawful practices occurredTesco is currently being investigated by the EU
21 Public OwnershipPublic Ownership – this is where the government own businessesThere are arguments for public ownership which include if goods are seen as public goods then the most efficient way for resources to be allocated may be through the marketIf externalities exist in the market the government may choose to provide the goods for consumers e.g. education, healthcare
22 Public Goods These are services that are provided by the government Pure public goods have the following characteristics:Non excludability – everyone can consume the goods whether they pay or notNon rivalry in consumption – consumption by one person doesn’t reduce consumption for othersExamples – street lighting, national defence
23 Advantages and Disadvantages of Public Ownership Provides jobs which are usually protected so reduces unemploymentFinite resources such as water and energy can be guaranteed and controlledAble to provide essential services to the whole countryDisadvantagesHigher costs for the government which means higher taxesInefficiency – public organisations are often inefficient due to diseconomies of scaleGovernment and political interference may reduce efficiency of operations
24 Privatization of Markets Privatization occurs when organizations that are owned by the public are transferred to private individualsDuring the 1980s there was intense privatisation of companies in the UK including: British Airways, British Gas and British PetroleumWhen businesses are privatised it allows for increased competition therefore monopoly power can be removed
25 Privatization of Markets – Advantages and Disadvantages Provides revenue for the governmentReduces trade union powerCan increase investment as businesses can use capital from sale of sharesMore incentives to increase efficiency therefore economic welfare is increasedMore competition brings more choice for the subjectDisadvantagesUnemployment may result as businesses try and reduce costsMonopoly power may still existPrivate sector may fail to allocate resources according to social costs and benefits
26 Regulation of marketsRegulation is the control of the market through rulesMany privatised companies are regulated by watchdogs e.g. Ofcom and BTRegulators ensure that the new companies don’t exploit their monopoly power and try and simulate competition allowing the companies to have a smooth transition into the private sectorThey become involved in activities such as price capping
27 Deregulation of the markets This is the act of removing rules and restrictions in the marketThe aim of deregulation is to open up the market and increase competitionDeregulation aims to increase contestability of marketsThose in favour of deregulation argue it results in lower prices for consumers, increases investment and in the long term can lead to increased economic growth
28 Notions of equity Equity is a notion of the fairness or justice Equality is a notion that everything should be the samePeople can have different views regarding what they view as fairDifferences in peoples views influence policy
29 Horizontal and Vertical Equity Horizontal equity states that people with a similar ability to pay taxes should pay the same or similar amounts.This relates to the concept of tax neutrality.Vertical equity states that people with a greater ability to pay taxes should pay more.
30 The problem of poverty Poverty can be measured in two ways: Absolute poverty – this looks at the amount of people who live below a certain level of incomeRelative poverty – this looks at the extent to which a households income is less than the average income in the UKRelative poverty measures allow us to look at inequalities in incomes and wealth
31 Government Policies to Alleviate Poverty and to Influence the Distribution of Income and Wealth The government try and alleviate poverty and create a more even distribution of income and wealthPolicies that they use include:Working credit and tax credit schemes to encourage low-income households to workNational minimum wage legislationSchemes encouraging long term unemployed to work e.g. new dealMinimum guaranteed incomes for pensionersProgressive tax – pay more they more you earn and tax free allowancesBenefits
32 Working credit and tax credit Working credit and tax credit schemes aim to encourage people to go to work on a full or part time basisThese schemes allow lower income families to gain more income from working than under previous schemes
33 National Minimum WageThis legislation has meant that the lowest paid workers have a guaranteed wage levelThis can lead to increases in absolute poverty
34 Schemes Encouraging Long Term Unemployed To Work These schemes are part of a long term strategy to decrease unemployment levelsIf people work they will be better off then if they claim benefitsIt is better for the government to have lower levels of unemployment as it means they don’t have to pay out for unemployment benefits and they gain revenue through taxation
35 Minimum guaranteed income schemes for pensioners Pensioners are one of the groups of the population most affected by povertyIn the UK the current % of pensioners living in poverty is 17%This figure has fallen and this is can partly be attributed to the pension credit scheme
36 Progressive TaxationIn the UK a progressive taxation is operated by the governmentProgressive taxation means that at higher salary levels you pay moreThere is a tax free amount that all people receive and the rate of tax increases as salary increases
37 BenefitsPeople who are unemployed, on low incomes or disabled can claim benefitsUnemployed people can claim unemployment benefits to cover living costsBenefits are paid to people for the following:Health careEducationTravelHousingSchool meals and welfare
38 Policies and Poverty Reduction In the past 10 years poverty levels have not been reduced in the UKThe main reason why poverty has not been reduced is that benefits have not risen at the same price as wage levels so income inequality has risen
39 Effective Ways to Decrease Poverty The most effective ways to reduce poverty include:Increasing the progressiveness of the tax system so it is more equitableUse wage inflation as a basis for increasing the value of benefits and tax creditsInvestment in training to reduce unemploymentLook at indirect taxation and its effects on incomes
40 Cost benefit analysisCost benefit analysis looks at social benefits and social costsCost benefit analysis involves a number of steps:Project appraisalLook at the value of social costs and benefitsMake an adjustment for time – discount future values so you can look at them at the current rateCompare social costs and benefitsLook at net rate of return for each project
41 Advantages and Disadvantages of Cost Benefit Analysis Allows for efficient allocation of resourcesDecreases negative externalitiesDisadvantagesCan be hard to put values to social costs and benefitsCan be difficult to include all externalitiesCosts and benefits can be different for different groups
42 SummaryMarket failure occurs when resources are not allocated efficiently e.g. in monopolies or where externalities existGovernments aim to reduce market failure with subsidies, taxation, regulation etcIntervention may increase or create market failureCompetition policy aims to reduce unfair competition and monopoly powerPublic ownership is the ownership of businesses by the governmentPrivatisation occurs when public firms are sold to private individualsRegulation is rules and restrictions imposed by the government on the market , deregulation is the removing of those regulationsEquity is the idea of fairnessPoverty is a problem for UK governments and they try and alleviate it with a number of policies including benefits, taxation, credits and minimum wagesCost benefit analysis aims to give values to social costs and benefits thereby resulting in more efficient allocation of resources