When the market did not appear to work well (there was obviously market failure present) the the government intervened in order to try to improve the situation. Specifically, the following forms of government intervention were identified:
1. Maximum Price
- If a price were seen to be too high, then the government might impose a maximum price.
- A maximum price could be imposed on a monopoly market in order to moderate the price.
- A maximum price might also be used if there were concerns that consumers could not afford an important product, such as housing.
- The effect of a maximum price of a maximum price could be to create shortages as is could lead to demand exceeding supply.
- Some markets are susceptible to undesirable swing in the market price of the product. This is particularly true of the agricultural market.
- Price may be stabilized by the government to protect the real incomes of both consumers and producers.
- In agriculture, the use of buffer stocks represents a way by which prices could be stabilized.
- Taxes can be used to discourage the production of a product. Subsidies encourage production.
- Taxes may be placed on products that generate negative externalities and would normally tend to be overproduced.
- Subsidies might be paid to producers of goods and services that have positive externalities and are merit goods. Such products, such as health care and education, would be underproduced by the free market.
- The government may decide to provide some products itself.
- The main economic justification for the government of goods and services is that they would not be produced otherwise. This can be seen to be the case with public goods.
- Resource: AS Level and A Level ECONOMICS, Colin Bamford, Keith Brunskill, Gordon Cain, Sue Grant, Stephen Munday, Stephen Walton, University of Cambridge International Examination, 2002
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