Docstoc

Government Intervention - PowerPoint

Document Sample
Government Intervention - PowerPoint Powered By Docstoc
					Government Intervention


Definition
Exchange Rates
Free Market Economy
Market Failure
Externalities
Definition

• When the state interferes with the working of an individual
  market e.g. through price controls. I.e. any form of
  government interference with market mechanisms.
  Intervention is the act of intervening in a market to try to
  influence the market outcome. An example of intervention
  is that the Bank of England intervenes daily in the money
  markets to ensure that interest rates are maintained at the
  level set by the Monetary Policy Committee. They could
  also intervene in the foreign exchange market to try to
  influence the exchange rate, though this has not been
  done for a number of years.
Exchange Rate

• The exchange rate is determined by the supply
  and demand for sterling. This diagram shows the
  government intervening by buying sterling to try to
  prevent the exchange rate falling.
Exchange Rate




 Click on image for further details
Demand and Supply




 Click on image for further details
Exchange Controls




Click on image for further details
Free Market Economy

• A system where resources are owned by
  households: markets allocate resources through
  the price mechanism; and income depends upon
  the value of resources owned by an individual.

            Ten Ethical Objections to the Market
            Economy
 Free Market Economy

• A free-market (free-trade or neo-liberal)
  economy is an idealized form of a market
  economy in which buyers and sellers are
  permitted to carry out transactions based on
  mutual agreement on price without government
  intervention in the form of taxes, subsidies,
  regulation, or government ownership of goods or
  services.
• The free market is considered the mainstay of
  ideologies such as minarchism and libertarianism
  and Western definitions of capitalism.
Free Market Economy

• It is anathema to communism and some variants
  of socialism, as defined in the West, although
  most variants of socialism seek to mitigate what
  they see as the problems of an unrestrained free
  market.
• In reality there are no totally free or ideal markets
  in operation. Lack of perfect knowledge,
  monopolistic practices, cartels, taxes and
  government regulation bias the equilibrium points
  of most large markets in existence today.
Free Market Economy

• Participants engage in information bias practices
  such as insider trading and price fixing. Some
  believe that the notion of a free market is
  inherently unachievable because they believe that
  governments are fundamentally involved in
  markets through the creation and enforcement of
  property rights.
• Others argue that the concept of property comes
  from natural law and therefore it is incorrect to see
  governments as creating markets.
Laissez Faire

• The term "laissez-faire" is used to describe an
  economic system where the government intervene
  as little as possible and leave the private sector to
  organise most economic activity through markets.
  Classical economists were great advocates of a
  laissez-faire system with minimal government
  intervention. They believed free markets were the
  best organisers of economic activity.
Laissez Faire

• Laissez faire is short for "laissez faire, laissez
  passer," a French phrase meaning to "let things
  alone, let them pass". First used by the eighteenth
  century Physiocrats as an injunction against
  government interference with trade, it is now used
  as a synonym for strict free market economics.
  Laissez-faire economic theories were popularized
  by Adam Smith.
Laissez Faire

• Laissez faire (imperative) is distinct from laisser
  faire (infinitive), which refers to a careless attitude
  in the application of a policy, implying a lack of
  consideration, or thought.
Laissez Faire

• The laissez-faire school of thought, or
  libertarianism, holds a pure capitalist or free
  market view, that capitalism is best left to its own
  devices - that it will dispense with inefficiencies in
  a more deliberate and quick manner than any
  legislating body could. The basic idea is that less
  government interference makes for a better
  system.
Planned Economy

• Economies in which the state decides what goods
  are produced, the methods of production, and who
  gets the goods.
• In the middle of the 20th century, dozens of
  countries and millions of people believed that
  central planning was the best way to run their
  economies.
 Planned Economy

• Even today there are many people who can’t quite
  understand why market economies invariably
  outperform planned economies; it would seem that
  at least some of the planned economies should
  have flourished.
• After all, there are advantages to centralizing
  economic decisions: virtually full employment is
  possible; income can be distributed more equally;
  central coordination should be more efficient;
  directing resources into investment should spur
  growth. So why did planned economies fail?
Command Economy

• In a democracy it is a choice to attempt to provide
  equal opportunity for all, the planning is still
  shared with the people.
• In a dictatorship decision making is in the hands of
  a few, who use the economy in a manner which
  protects the state.
Command Economy

• Decisions are made about:
  – What to produce, Where to produce it, Who produces it,
    Who will be eligible to purchase it, How much and How
    to produce and What to charge.
  – The state allocates resources, and sets production
    targets and growth rates according to its own view of
    people's wants. The state allocates resources, and sets
    production targets and growth rates according to its
    own view of people's wants.
• Elements of the Command Economy
Market Failure

• Market failure occurs when the workings of the
  price mechanism are imperfect and result in an
  inefficient or grossly unfair allocation of resources
  from the perspective of society. Examples include,
  the education and defense markets.
The Myth of Market Failure
 by Russell Madden


Those opposed to laissez faire capitalism and the
free markets through which it operates love to shout
"market failure" as a rationale for government
intervention into economic activities. Only by limiting
citizens' freedom, they claim, can the state correct
the failings of an imperfect market.
The Myth of Market Failure

By "market failure," these governmental meddlers
into private interactions mean a number of different
things. They may refer to:

• the unequal distribution of wealth;
• the belief that some "public goods" such as
  roads, utilities, postal service, lighthouses,
  libraries, schools, or operas would not be
  adequately provided in a free market;
The Myth of Market Failure

• the "free rider" problem where those who do not
  pay for a service nevertheless enjoy its benefits;
• the notion that resources often go to produce such
  "frivolous" items as pet rocks, junk food, or trashy
  movies;
• the fact that certain objectively superior goods will
  be under-produced or ignored;
• or just overall "inefficiency" in matching human
  needs and desires with economic goods.
Government Failure

• When a government fails to intervene in a market
  economy to correct inefficient allocation of
  resources
Price Mechanism

• Prices act as a signal to firms and consumers to
  adjust their economic behaviour. For example a
  rise in price encourages producers to switch into
  making that good but encourages consumers to
  use an alternative substitute product.
Externalities

• Externalities are common in virtually every area of
  economic activity. They are defined as third party
  (or spill-over) effects arising from the production
  and/or consumption of goods and services for
  which no appropriate compensation is paid.
• Externalities can cause market failure if the price
  mechanism does not take into account the full
  social costs and social benefits of production
  and consumption.
Externalities

• The study of externalities by economists has
  become extensive in recent years - not least
  because of concerns about the link between the
  economy and the environment.
Negative externalities

• Impacts on `outsiders` that are disadvantageous to them
  and for which they receive no compensation. The
  externalities are occurring where the actions of firms and
  individuals have an effect on people other than
  themselves. In the case of negative externalities the
  external effects are costs on other people. They are also
  known as external costs. There may be external costs
  from both production and consumption. If these are added
  to the private costs we get the total social costs. An
  example of negative externalities would be the side effects
  of production processes e.g. the pollution (noise, dust,
  vibration) endured by people living next to a quarry.
Negative Externalities in
Consumption




 Click on image for further details
Negative Externalities in Production




  Click on image for further details
Positive externalities

• Impacts on `outsiders` that are advantageous to them and
  for which they do not have to pay. Externalities occur
  where the actions of firms and individuals have an effect
  on people other than themselves. In the case of positive
  externalities the external effects are benefits on other
  people. These are also known as external benefits. There
  may be external benefits from both production and
  consumption. If these are added to the private benefits we
  get the total social benefits. An example of positive
  externalities would be the side effects of production
  processes e.g. the benefits to some local people that stem
  from the growth of a major industry causing traffic.
Positive Externalities in Production




  Click on image for further details
Positive Externalities in
Consumption

• If there are positive externalities in consumption
  then the marginal social benefit will be greater
  than the marginal private benefit.
Positive Externalities in
Consumption




  Click on image for further details
Marginal Private Benefit

• The increase in private benefit resulting from the
  consumption of one more unit or the production of
  one more
Marginal Private Benefit




  Click on image for further details
Marginal Private Benefit and Social
Benefit




  Click on image for further details
References

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:15
posted:9/29/2011
language:English
pages:37