1.
Reasons for Government
Intervention in Market
Prepared by Ms Viky
Course: AL-ECO
CHAPTER 3
Government Microeconomic
Intervention

2.
Today`s Discussion
• Addressing the non-provision of public goods
• Addressing the over-consumption of demerit goods and the
under-consumption of merit goods (link back to ME)
• Controlling prices in markets (taxes, subsidy, min price,
max price)

3.
• There are several types of government intervention on market
equilibrium.
• The form of interventions are fixing higher or lower limit on
prices in certain markets and imposition of taxes and subsidies
for certain items.
• This type of government intervention in the market can be
explained using demand and supply analysis.
3
Introduction

4.
Government Intervention
• The main reasons why government intervene market:
▫ To correct market failure: it is necessary for
government to provide public goods and merit goods, as
these goods will be underprovided in free market.
▫ Market failure: free market does not make best use of
scarce resources.
▫ Improve the efficient in allocation of resources.
▫ To achieve equal income and wealth distribution.

5.
Methods of Government Intervention
1. Regulation: various means by which government seeks to
control production and consumption.
• Rules and laws that applies to firms to control the free
market.
• Uses legal or other methods such as control of price,
quality and quantity of goods and services that are
produced or consumed.
• E.g. doctor prescription to buy controlled drugs.

6.
Regulation

7.
Methods of Government Intervention
• Advantage of regulations:
• prevents overconsumption of merit goods
• Avoid abuse of market power
• Reduce pollution (externalities)
• Allows local businesses to survive
• Disadvantage of regulations:
• Less freedom
• Less competition among producers
• Less revenue
• Difficulty in implementation of regulation

8.
Methods of Government Intervention
2. Financial intervention: use of taxes and subsidies.
• Government uses taxes and subsidies as a financial tools to
influence the production and price of the goods or services
in an economy.
• Tax: charges imposed by government on incomes, profits
and some types of consumer goods and services to fund
their expenditure.
▫ E.g. stamp duty, income tax, GST, service tax etc.
Tax / subsidy affects the supply curve (paid by producers)
Supply and demand don’t draw income tax

9.
Methods of Government Intervention
2. Financial intervention: use of taxes and subsidies.
• Subsidies: a direct payment or grants by government
to producers, make the price paid by consumer less than
it should be.
▫ Subsidies goods and services that benefit community and
might not provide under free market.
▫ E.g. certain food, public transports, free school meals for
kids from low income families.

10.
Methods of Government Intervention
3. Government provision / direct provision
• Government to take over the production of goods or
services, either in part or in whole.
• Supply the goods or services directly to customer free of
charge.
• State owned industries: electricity, water provision,
railways.
• Also applies to those industries supplied by both public
and private sectors: education, hospitals.