A project on the Role of government intervention in the market

1. Role of
Government
Intervention in
the Market
By: Safeer ali
1

2. Regulatory actions taken by a government in order to affect or
interfere with decisions made by individuals, groups,
or organizations regarding social and economic matters.
2

3. Reasons for government intervention
in the market:
3
I. Provide information and assure information flows
II. Combat externalities.
III. Provide public goods
IV. Control noncompetitive behavior
V. Change income distribution.

4. Reasons for government intervention
in the market:
4
1. Information
Some examples of government policies to promote the
dissemination of information:
 Education and
extension.
 Public supported media
and information delivery.
 Price assembly and
distribution by
government.
 Labeling requirement.
Truth-in-advertising
policies.

5. Reasons for government intervention
in the market:
5
2. Externalities
Externalities are a loss or gain in
the welfare of one party resulting
from an activity of another party,
without there being any
compensation for the losing
party. Externalities are an
important consideration in cost-
benefit analysis.
There are four types of
externalities:
Negative Externalities
Positive Externalities
Production Externalities
Consumption Externalities

6. Reasons for government intervention
in the market:
6
I. Negative externality
A negative externality is a cost that is suffered by a third party as a result
of an economic transaction. In a transaction, the producer and consumer
are the first and second parties, and third parties include any individual,
organization, property owner, or resource that is indirectly affected
price
output0
MSB
MSC
P
Q
MPC
P1
Q1
External
Cost

7. Reasons for government intervention
in the market:
7
II. A positive externality is a benefit that is enjoyed by a third-
party as a result of an economic transaction. Third-parties
include any individual, organization, property owner, or
resource that is indirectly affected
cost &
benefit
Output0
MSC
MPB
p
Q
MSB
Q1
Welfare loss

8. Reasons for government intervention
in the market:
8
III. Production Externality
Costs of production that must ultimately be paid by someone other
than the producer of a good or service. Production externalities are
usually unintended and can have economic, social and environmental
side effects.
IV. Consumption Externality
This occurs when consuming a good causes either a positive or
negative externality to a third party.

9. Reasons for government intervention
in the market:
9
3. Public Goods
Public goods can be consumed concurrently by more than one
individual and are free to access. Examples include:
 Knowledge from education and public research
 National security
 International trade agreements
 Infrastructure, such as roads, bridges, etc.
 Environmental amenities, such as clean air, nice scenery

10. Reasons for government intervention
in the market:
10
4. Noncompetitive Behavior
There are many forms of noncompetitive behavior.
Examples of the more extreme forms include:
 Monopoly: One agent controls supply of a good.
 Monophony: One agent controls demand for a good
(unions).
 Middleman: One agent buys the product from
suppliers to sell to demanders.
Other forms of noncompetitive behavior include cartels,
oligopolies, and monopolistic competition. Policies
used to control noncompetitive behavior include anti-
trust legislation and regulation of natural monopolies
(e.g., public utilities).

11. Reasons for government intervention
in the market:
11
5. Distribution
Governments change the
distribution of income and/or
wealth through government
transfer policies such as:
Income Taxes and
Inheritance Taxes, Social
Security, Medicare,
Medicaid, and AFDC.

12. Tools of GOVT intervention in the
Market:
12
1. Taxes
2. Subsidy
A tax (from the Latin taxo; "rate") is a
financial charge or other levy imposed upon
a taxpayer (an individual or legal entity) by
a state or the functional equivalent of a state
to fund various public expenditures.
A subsidy is a form of financial aid or
support extended to an economic sector
(or institution, business, or individual)
generally with the aim of promoting
economic and social policy

13. Using Taxes to Correct Market
Distortion:
13
Cost &
benefit
Quantity0
Dp
MC=S
Q1
MSC
Q2
Social optimum
External cost
Optimum tax =
MSC MC

14. Using Subsidies To Correct
Market Distortion:
14
Cost &
benefit
Quantity0
p D
MSC
Q2
MC=S
Q1
External benefit
Social optimum
MC
Optimum subsidy= MC MSC

15. 15