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7 Market Intervention

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© John Tribe

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

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The free market

• The benefits of free markets– economic efficiency– allocative efficiency– consumer sovereignty– economic growth

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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

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The free market

• Competition leads to “Rock-Bottom” prices

• But are there any economic problems with cheap air travel?– Increased carbon

emissions– Increased noise

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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.

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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

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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?

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Market intervention

• central planning• control of

monopolies and mergers

• laws, planning controls and permits

• taxes and subsidies

• public provision

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Public / private leisure mix

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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.

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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

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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

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Public or Private?

• What are the pros and cons of public ownership of railways?

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Trends in public sector provision

• Central planning

• Privatization

• Service standards

• Performance targets and indicators

• Contracting out

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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.

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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

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7 Market Intervention:

The End