Reasons for Government Intervention

Economics: Edexcel A A Level, topic 6.3.1

Market Failure - Reasons for Government Intervention

The free market can result in a misallocation of resources (or market failures). Governments can intervene to correct these market failures.

In a market-based economy, a consumer's ability to consume goods and services depends on their income and wealth.
If a consumer has a low income, they may not be able to afford basic goods to satisfy their needs.
The market is under-providing these goods and this can be a source of market failure.

Governments may want people to consume more things like education, which have positive externalities.
Subsidies or free state provision may be used to encourage the consumption of merit goods.

The UK government has a Nudge unit, which implies that consumers may not be rational agents and need guidance.

Governments have a number of objectives in mind when they are implementing policies.

Governments aim to improve the wellbeing of their citizens.
One of the main ways to do this is by encouraging them to make rational choices, often through correcting market failures.
This can be done by reducing the asymmetry of information - by giving consumers as much information as possible about the choices they make.
Examples of information governments can provide include:
Mandatory nutritional information on food packaging.
League tables for schools.

A range of policies are needed to satisfy government goals.
Some industries benefit from nationalisation because they do not function well under the price mechanism.
Some industries, like train tracks or Network Rail may be natural monopolies and could benefit from nationalisation.

Another policy objective is the growth of small to medium size businesses.
These businesses benefit from deregulation.
A combination of policies (such as deregulation and nationalisation at the same time) are required by the government to achieve their goals.

Which of the following are reasons for government intervention in markets?
Which of the following is a reason why basic needs may not be met in a free market?
Which of the following is NOT a goal of government interventions in the market?
Which businesses benefit from deregulation?