What is laissez faire economics?
- In a free market system, governments take the view that markets are best suited to allocating scarce resources and allow the market forces of supply and demand to set prices.
- The role of the government is to protect property rights, uphold the rule of law and maintain the value of the currency.
- Competitive markets often deliver improvements in allocative, productive and dynamic efficiency
- But there are occasions when they fail – providing a case for intervention.
What are the main reasons for government intervention in markets?
The main reasons for policy intervention by the government are:
The main reasons for policy intervention by the government are:
- To correct for market failures
- To achieve a more equitable distribution of income and wealth
- To improve the performance of the economy
Type of Market Failure
| Consequence of Market Failure | Example of Government Intervention | |
| Factor immobility | Structural unemployment | State investment in education and training |
| Public goods | Failure of market to provide pure public goods, free rider problem | Government funded public goods for collective consumption |
| Demerit goods | Over consumption of products with negative externalities | Information campaigns, minimum age for consumption |
| Merit goods | Under consumption of products with positive externalities | Subsidies, information on private benefits |
| Imperfect information | Damaging consequences for consumers from poor choices | Statutory information / labeling |
| High relative poverty | Low income families suffer social exclusion, negative externalities | Taxation and welfare to redistribute income and wealth |
| Monopoly power in a market | Higher prices for consumers causes loss of allocative efficiency | Competition policy, measures to encourage new firms into a market |
Read more from tutor2u and ESPECIALLY look at the SLIDESHARE |
