Government and the Economy

Government Intervention

Market failure:The government intervenes to modify how the economy operates because market economies fail to provide the economic, social and environmental outcomes considered desirable by the population

LIMITATIONS OF FREE MARKETS

Provision of goods and services Income inequality Environmental externalities Monopoly power Business cycle fluctuations

Provision of goods and services

The govt provides public goods and services (roads, police)

Public goods are non excludable and non rival

Private sector won’t provide them because of free riders

The govt also provides merit goods (public transport, education, health care)

The private sector provides as inadequate quantity of these services. Therefore the government intervenes because it is in the public interest to provide additional services

Redistribution of income

Market economies are based on the incentive effect and reward for the factors of production.

This causes income inequality – the govt intervenes in order to minimize social problems that may arise – absolute poverty, crime

Lowest

quintile

Second

quintile

Third

quintile

Fourth

quintile

Highest

quintile

Private

income 0.4% 5.4% 15.9% 27.5% 50.8

Final

Income 6.4% 13.7% 18.0% 24.3%

37.6

Externalities and the Environment

An externality is a side-effect of economic activity not accounted for by the price mechanism.

Externalities can be positive (social benefit) or negative (social cost)

The govt intervenes to minimize negative externalities

Monopoly Power

Competition between firms leads to increased efficiency and lower prices – increases consumer power.

The Trade Practices Act outlaws anti-competitive behaviour – monopolisation, price discrimination, exclusive dealing, collusion.

The ACCC enforces the Trade Practices

Act –

www.accc.gov.au

Examine one investigation of the ACCC – Why did the ACCC intervene?

What was the outcome of the investigation?

Govt run monopolies provide important goods and services – water, gas, electricity

Over the last 10 years the govt has privatised or corporatised many of its trading enterprises (PTEs)

Why? advantages/disadvantages

Market Instability

Market economies will always experience booms and recession – business cycles

Booms – high eco growth, low unemployment, high import spending, high inflation.

Recession - negative growth, high unemployment, low import spending, low inflation or deflation

Monetary and Fiscal Policies are countercyclical demand management macro economic policy tools designed to control aggregate demand

Micro economic policies attempt to improve the efficiency of the supply side of the economy

The secret to a great HSC

Run to class because you love economics