1. © John Tribe 7 Market Intervention

2. © John Tribe

3. Learning outcomes By studying this section students will be able to: – evaluate the benefits of the free market – evaluate the problems of the free market – understand the methods of market intervention – justify market intervention – understand recent developments in public sector provision

4. © John Tribe The free market The benefits of free markets – economic efficiency – allocative efficiency – consumer sovereignty – economic growth

5. © John Tribe The free market Criticisms of the market solution – the inappropriateness of the perfect market assumption – reservations about consumer sovereignty – externalities* – public goods* – realities of economic growth – equity

6. © John Tribe The free market Competition leads to “Rock-Bottom” prices But are there any economic problems with cheap air travel? –Increased carbon emissions –Increased noise

7. © John Tribe Externalities: Merit goods Goods which include substantial social benefits are sometimes termed merit goods. A merit good is one which the government feels that people will under consume and which therefore ought to be provided free or subsidised.

8. © John Tribe Externalities: Demerit goods Goods which include substantial external costs are sometimes termed demerit goods. A demerit good is one which the government feels that people will over consume and which therefore ought to be banned or taxed

9. © John Tribe Public Goods A public good is defined as a good or service which has features of non-rivalry and non- excludability and as a result would not be provided by the free market Why would lighthouses not be supplied in free markets?

10. © John Tribe Market intervention central planning control of monopolies and mergers laws, planning controls and permits taxes and subsidies public provision

11. © John Tribe Public / private leisure mix

12. © John Tribe Monopoly One way to measure the degree of monopoly in an industry is to examine the concentration ratio. Thus the four firm concentration ratio shows the market share achieved by the largest four companies. In the UK package tour industry in 1998 the four firm concentration ratio was 85% (Begg, Fischer, and Dornbusch, 2002) indicating a high degree of market imperfection and potential monopoly power.

13. © John Tribe Monopolies Are these passengers being ripped off? –Probably Why? –Many ferries operate in near-monopoly conditions. So they may pay high prices for tickets and certainly will for on-board catering

14. © John Tribe Problems of market intervention Resource allocation in disequilibrium Public ownership: efficiency and culture Side-effects of subsidies and taxes Loss of consumer sovereignty Measurement of external costs and benefits Equity Government interference and changing objectives

15. © John Tribe Public or Private? What are the pros and cons of public ownership of railways?

16. © John Tribe Trends in public sector provision Central planning Privatization Service standards Performance targets and indicators Contracting out

17. © John Tribe Review of key terms Consumer sovereignty = –goods and services produced according to consumer demand. Economic efficiency = –maximum output from minimum input. Allocative efficiency = –maximum output from given inputs and maximum consumer satisfaction from that output. Externalities = –costs or benefits which have social significance.

18. © John Tribe Review of key terms Merit goods = –goods with external benefits. Demerit goods = –goods with external disbenefits. Public goods = –goods which are non-excludable and non- rival. Concentration ratio = –percentage of market share held by top companies

19. © John Tribe 7 Market Intervention: The End