1.5.2 Government intervention and failure


    Purpose of government intervention

    • Reducing impact of external costs such as pollution.
    • Ensuring that under-produced products are available to all.
    • Ensuring that over-consumed products such as tobacco are discouraged and prevented.
    • Reduce anti-competitive behaviour to ensure fair prices for the consumer.


    1. Legislation
    2. Regulation
    3. Subsidies
    4. Voluntary agreements
    5. Indirect taxation (green tax)
    6. Tradable permits
    7. Legislation
    • Can ban/restrict bad practices
    • Expected standards are clear
    • Consequences are known
    • Difficult to enforce, expensive
    • May not deter
    1. Regulation
    • Used to set environmental standards and then monitor and control activity e.g. quota or minimum standards.
    • The UK Environmental agency can inspect, fine and prosecute.
    • It is costly and difficult to enforce.
    1. Subsidies
    • Government grants for under-consumed ‘beneficial’ goods e.g. solar panels.
    • Makes them cheaper and increases demand.
    • Reduces demand for energy from non-renewable sources (which contain externalities.)
    • Costs government funds
    1. Voluntary agreements
    • Government tries to persuade businesses to adopt their own code of ethics to reduce externalities
    • Keeps producers on side
    • Not all businesses will sign up due to the extra cost
    1. Indirect taxation (green tax)
    • Increases the price of harmful goods, by increasing cost of production
    • Reduces externalities
    • Raises money for the government
    • May not stop consumption
    1. Tradable permits
    • Firms are given pollution permits which they can trade
    • Sets a limit on external costs
    • Incentives for firm to trade permit and produce cleaner
    • Expensive/difficult to implement

    Another method that may be used may be advertising/education campaigns designed to change behaviour, spread awareness and reduce negative externalities.

    Government failure occurs when the government attempts to deal with market failure, it creates other problems. There are 4 main ways in this happens:

    Distortion of price signals: government subsidies can distort price signals by distorting the free market mechanism. Incentives may not work as the government expects, and they might subsidise a market which is failing.

    Unintended consequences: their actions can cause other problems e.g. when minimum wage rose in 2015 it actually increased unemployment rates as employers could not pay the higher wages.

    Excessive administrative costs: this is a problem, especially when it involves monitoring compliance in areas where people are not committed to the framework.

    Information gaps: they may not have enough information to make a good decision and may not know the true cost of intervention.


    In the UK housing market, there is failure due to the housing shortage, which means resources are not being allocated efficiently. This shortage affects the mobility of labour. It is partially caused by information asymmetry, where sellers know more than buyers.

    In the labour market, market failure is caused by immobility, skills gaps and discrimination within the market. The government might intervene by implementing a National Minimum Wage or having an Equal Pay Act. There is also a minimum school leaving age, to ensure workers have a sufficient basic education. The NMW could lead to government failure if instead of raising living standards, people become unemployed.


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