Sunday, 17 April 2011

Government Intervention - Regulation (Microeconomics)

Government intervention is when the government intervenes in the market to attempt to correct the market failure. This post will be on a specific type of government intervention - regulation.

Regulation comes in three different forms, these being laws/legislation, price controls and control of monopoly powers.

Laws and legislation is pretty self explanatory, passing laws or introducing legislation as an attempt to fix the market failure. An example of this would be passing the law meaning you have to be 18 to purchase alcohol. Alcohol is a good with negative externalities, thus is causing market failure. So passing the law means that the consumption of alcohol is limited somewhat and the market failure should be lessened.

Price controls is also a fairly self explanatory form of government regulation. It involves setting a minimum or maximum price for the good to affect the consumption. An example is the minimum wage, that is classed as a minimum price. This reduces the consumption of low paid workers, and corrects that market failure to a certain extent.

Finally, control of monopoly powers. This is the government intervening in a market where a monopoly exist to try and stop consumers being ripped off so to speak. In a monopoly market, one firm/business/individual has a large majority of that market, meaning they are pretty much in control and can set prices to whatever level they like whilst offering a poor service and still receive customers. Controlling these monopoly powers means the government will get involved to limit how much power the monopoly business has to protect the consumer, thus correcting the market failure.

That's about it, but ill list a few more examples of goods/services that have regulations imposed on them.

  • Tobacco - Required to be 18 to buy it, shops need a license to sell it.
  • Education - Law makes it compulsory. Not relevant anymore, but there used to be price controls with the maximum tuition fees.
  • Driving - Law to wear a seatbelt.

Thanks for reading, up next is government intervention - Taxation!

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