Government Intervention.

Here are some examples to practise your chains of analysis and evaluation skills with regards to government policy and market failure.  Do not forget that intervention can result in government failure.

  • subsidies e.g. the bio-fuel debate or subsidies for industries affected by globalisation
  •  indirect taxes e.g. environmental taxes or taxes designed to curb demand for / consumption of de-merit goods
  • the introduction of competition into a market e.g. postal market liberalisation
  • an increase in government spending on public goods and merit goods such as flood defence schemes, free entry to museums and galleries
  • different strategies designed to reduce income and wealth inequality e.g. the national minimum wage or a rise in the top rate of income tax
  • the introduction of carbon trading as a way of reducing CO2 emissions
  • different policies designed to reduce unemployment e.g. comparing the effectiveness of investment in training with an employment subsidy for the long term unemployed
  • major infrastructural projects such as new motorways, London 2012
  • a decision to relax planning controls on new house-building

Australia’s Carbon Tax

The carbon tax was introduced in July 2012 on about 300 of the largest polluters. Australia’s carbon emissions make up 1.5% of the world’s total. The tax was seen as a remedy to correcting market failure and a more effective method than the carbon trading scheme in Europe. However, it has caused a significant increase in the costs of production causing a loss of jobs and an increase in energy prices for the consumer. Is this an example of the’ polluter pays’ principle and internalising the costs thus establishing a more desirable equilibrium? Abbot, the Australian prime minister is now looking to scrap the tax. Will he replace it with anything? Will this be an example of government failure?

introducing the tax        scrapping the tax

Case studies on market and government failure.

Market failure is the misallocation of resources resulting in either no equilibrium or an undesirable equilibrium from the perspective of society.  Is there one panacea governments can introduce to increase economic and social welfare or is it a combination of policies?  Is it a given that once government wield their magic wand all is remedied or can they actually worsen the situation? How many different types of government intervention can you spot?  Remember that examiners will credit candidates that use  their own examples.

making things worse            plastic bags at the supermarket       congestion charge and ped        fracking and some unit 2minimum price of labour     one more coke please    kuwait #1 for water consumption     subsidies in the gulf                   lift the ban       speed kills                                     KD 500 for not going to school         get advice early and reduce the opp cost

Even firms know what you have for breakfast now…

The link below talks about firms (using one in Canada as an example) being able to track your location and movements through your mobile phone. Using this, producers will be able to market their goods/services to cater for specific consumer tastes, rather than “guessing”. The possible private benefits are massive, BUT ( and this is a big but) what happens if they start selling this information? Do the costs outweigh the benefits? Putting that aside, do you really want random people to know what you have for breakfast, where you work or even where you live?

we know all about you

Long Term Unemployment

Bit of term 1 recap for Y12s – long term unemployment. Since the recession of 2008, people have found themselves unemployed for long periods of time. This issue is of paramount importance to Governments around the world due to its negative effects on the economy and society as whole.

In order to prevent long term unemployment, Government’s usually provide Unemployment Benefits specifically directed towards these persistently unemployed citizens. Recently, the US Government has delayed the renewal of this benefit, leaving 1.3 million Americans cut off from such aid. This has sparked debate within the Government on whether or not to renew this bill.

Long Time Gone (The Economist), White House Presses Republicans (The Guardian)

– Krish

Looks like I’ll have to sell my other Ferrari!

ownership of cars limited

To reduce the negative externalities brought about by private transport, Kuwait plans to adopt a new policy limiting the amount of cars a household can own. The ‘genius’ (and there’s quite a bit of sarcasm here) solution that they’ve come up with is to limit the amount of cars a Kuwaiti can own to two, and an expat to one. Surely if they were truly looking out for the future generations, they would have it the other way around – it is the expats who need to be allowed the greater number of cars so that they’re able to drive to work, and do the jobs that the Kuwaitis cannot, and do not want to, do. The Kuwaiti Government plans to tax expats owning more than one car a fee of 100KD, but whether this is a one-time thing or not remains to be determined.
Kuwait is home to 2.2 million foreigners, making up two thirds of the country’s population. Of those foreigners, the ones who don’t own cars, or more than one car, are most likely to be unskilled workers and domestic helpers. Therefore, the tax burden will fall primarily on the skilled labourers, and should they decide to relocate,  the consequences of this brain drain could be very damaging to the Kuwaiti economy. But Kuwait’s got oil and money, so yolo.

(PS – since I haven’t heard a whole lot about this, I’m not sure how reliable the article is. Still, even if it isn’t true, it’s still something to keep in mind when answering a question about policies to reduce negative externalities of private transport; the evaluation part will be a breeze.)