How Government Intervention Can Cause Government Failure

The economic problem of what to manufacture and to produce it would be left entirely to the market without the government intervening at all, this is referred to as ‘market failure’. To help the government know which sector to give money to, they have ‘the budget’ which is used to show the intentions of the government and where they want to put their money towards. It’s given out yearly in March, by the Chancellor of the Exchequer, and the budget includes; how the government spending will be financed, to change tax rates or introduce new ones, also to help achieve economic success such as growth and employment, and finally to influence the spending on specific goods that affect the environment such as alcohol and cigarettes. However, there is a ‘budget deficit’ when the government spending is more than the level of taxation and there is a ‘budget surplus’ when the level of taxation is more than the level of spending.

Nevertheless, there are times where the government need to step in and intervene and one of them is ‘The existence of imperfect markets’ this is when there is little or no competition, which is bad for the economy because the economy thrives on rivalries. So the government intervenes when one firm or company has a huge amount of market power so they can have multiple firms operating, which is an economics term called a ‘low degree of concentration’ which means there’s many firms and ‘a high degree of concentration’ means the opposite, so this evens things out.

Another reason when the government intervene would be ‘the existence of externalities’ If someone’s actions results in costs falling on other groups without there being an compensation paid therefore an external/ social cost has been generated. An example would be that the government would have to monitor the situation and if a company was emitting high levels of pollution they would be fined. Another reason would be ‘the consumption of certain commodities is bad from a social point of view’ if something is bad for the environment the government can start banning certain commodities such as drugs and they can show warnings on products such as cigarettes to show that they are harmful. Another reason would be ‘to provide merit good’ Examples of merit goods would be Education and health services, some individuals don’t think these services are worth saving money for or some individuals might be unable to pay for these services. This is where the government steps in and provides these services commonly known as ‘merit goods’.

The government also intervenes ‘to provide public goods’ again these are commodities that even if these were useful to people they would still not pay for it, so the government provides them and increases the price in taxation. The amount of spending to public goods will vary and will be determined on multiple things such as circumstances and political viewpoints.

Competition policy is mainly a way to promote competition, to attempt to make markets work better and to put more effort towards improved efficiency in individual markets and increase the rivalry of UK businesses within the European Union single market. The government wants more competition because if there’s more competition there’s more success for the government. The government also wants to prevent and reduce the abuse of monopoly power. The policy aims to ensure Technological innovation which promotes positive efficiency in different markets. Effective price competition between suppliers, so there’s more than one option to pick from, your options aren’t limited. The final aim is to safeguard and promote the attention of customers through increased choice and lower priced level of goods.

There are four key pillars of competition policy in the UK and EU one of them is, ‘Antitrust & cartels’ this involves the removal of agreements that prevent competition including price-fixing and other agreements that firms hold to dominant a market position wrongly. The second pillar is ‘Market liberalisation’ this involves the introducing of competition in previous sectors such as retail banking, postal services, mobile telecommunications, energy supply and finally air transport. The third pillar is ‘State aid control’ this pillar of the competition policy analyses the state aid measures such as airline subsidies to make sure that this doesn’t affect the level of competition in the single market. The final pillar is ‘Merger control’ There is an investigation of mergers and takeovers between firms for (e.g. a merger between two large groups would result in them dominating the market. To make this government policy achievable the government need regulators, regulators are rule-enforcers and they are appointed by the government to see how the market works and the outcomes that result for producers and the consumers. The main competitive regulator in the UK is the competition and Markets Authority, the EU competitive commission is also an important regulator too. Some example the policy in action would be, ‘De- regulation’ which are laws to reduce monopoly power, and introducing competition laws and preventing mergers that create a monopoly. Another example would be ‘tough laws on anti- competitive behaviour’ if a firm is proven guilty of price fixing or market sharing, the penalty could be a fine or even jail.

Overall, in my option I think the competition policy has some success and failures, I’m going to outline both of these factors starting with the success of it first, I think it’s been successful in decreasing the amount of monopoly power that it has and doesn’t let one firm or business be dominant its fair and this means that everyone shares equal power. The failures of it though are that very few mergers are actually investigated each year, this is down to it being impossible to prove, although they are heavy fines they can’t prove it, so in my opinion the competition policy is still a good policy it just has to improve on its failures.