Government Intervention & Failure

Government Intervention & Failure

Government failure occurs when a public sector activity or gov intervention, intended to correct a market failure, makes the situation worse than better. E.g. Gov intervene through taxation to reduce smoking, but this is a regressive tax to the working class (majority smokers) and an example of government failure.

Government regulation and legislation

__Legislation __– Legislation is the process of making new laws.

__Regulation __– Regulation is a law being maintained by authority.

Government legislation and regulation is how the government controls business and stops them breaking laws. There are five kinds of government regulation, these include:

  • __Advertising __- advertising regulations stop business from fake advertising, for example in 2014 Red Bull, claiming the drink gave you wings the company settled in a class action case by agreeing to pay out a maximum of $13 million.

This also includes the compliance with the Fair Packaging and Labelling Act of 1966, all product labels must include information about the product, such as nutrition, size, and distribution and manufacturing information.

  • Employment and Labour – On 1st October 2004 the Employment Relations Act came into place, this gave workers the right to be part of a union, and gave workers the right to a hearing when being dismissed.

The Fair Labour Standards Act also sets the minimum wage for workers and is part of employment and labour regulations.

  • __Environmental __- The carbon footprint of businesses on the environment is regulated by the Environmental Protection Agency alongside state agencies. The EPA (environmental protection agency) enforces environmental laws passed by the government through educational resources. The Environmental Compliance Assistance Guide is there to help businesses achieve environmental compliance, and serves as an educational resource more than an enforcer.

  • __Privacy __- Sensitive information is usually collected from employees when being hired, or through business transactions, and privacy laws prevent businesses from sharing this information freely. Information collected can include social security number, address, name, health conditions, credit card and bank numbers and personal history. There is also a regulation in place that gives employees the right to sue if this information is shared.

  • Safety and Health

The Safety and Health Act of 1970 ensures that employers provide safe and sanitary work environments through frequent inspections and a grading scale. This has changed slightly over the years but the basics are still the same.

Indirect tax

  • Free market price signals can be modified by indirect taxes or subsides. (a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low).

  • The main three UK excise duties are on tobacco, alcohol, petrol and diesel.

  • Sales of three of these products of these products bring in heavy profits and contribute a lot to the governments revenues.

  • Per unit tax – fixed amount of tax paid on goods regardless of price of the good, like airport tax.

Government Intervention & Failure, figure 1

Examples of indirect tax:

  • Sale tax - collected by the shops and passed onto the government.

  • Custom duties – tax on imported goods for example – protect domestic industry

  • Excise duties – tax placed on certain goods to lower demand – for example on cigarettes

The poor can contributeRegressive – have bad effects on the poor more than the rich
Convenient – tax is price coatedUncertain
Broad based - spread over a lot of goodsRaising prices unduly
Easy collectionUneconomical
Non-evadableHarmful to industries
ElasticNo civic consciousness
Imposed on harmful products

Voluntary agreements

Definition: A voluntary agreement is an agreement between a business (the Payer) and a contract worker (Payee) to bring work payments into the pay as you go (PAYG) withholding system.

Oliver Lewtin, a conservative minister in the UK government since 2010, gave four reasons for emphasising a voluntary (non-regulatory) approach. “Effectiveness, cost- effectiveness, less rigid imposition and reduced burden on business.”


  • In 2013 a ‘Traffic Light’ system of food labelling was agreed voluntarily by major UK supermarkets. Particularly unhealthy levels of sugar, fat and salt are highlighted in red in this system.

  • Retailers including Asda, Sainsbury’s, Tesco and Morrison’s are backing a voluntary agreement, which also targets a 20 per cent reduction in greenhouse gas emissions created by the food and drink industry.

  • In 2013 the major UK banks reached a major voluntary agreement on provision of basic bank accounts.

In its 4th January 2015 edition, The Observer reported that the voluntary standards of care for laser eye surgery, covered in ‘Good Medical Practice’ from the General Medical Council, “are not always being followed by high street providers.” The results of this have sometimes been troubling. Firms negotiating voluntary agreements might find ways to soften the impact on their business, even if that comes at the expense of consumers or society. Some agreements are worded loosely, potentially allowing firms to go against the intended spirit, without risking any formal penalty. Executives can put the interests of their shareholder ahead of wider considerations.

Grants and subsidies


  • Amount of money given directly to firms by government to encourage production and consumption.

  • A unit of subsidy is a specific sum per unit produced, which is given to the producer.

  • __Example: __if a domestic industry such as farming struggling in international competitive market maybe government will give cash subsidy so they can still sell a low prices but still achieve financial gain.

  • Subsidy more popular than taxation but then has an opportunity cost – other public appending or lower taxes.

Government Intervention & Failure, figure 1

Here’s some articles worth reading on subsidies by the Financial Times and the Telegraph.

Causes and examples of government failure

Government intervention to resolve market failures can also fail to achieve a socially efficient allocation of resources. Government failure is a situation where government intervention in the economy to correct a market failure creates inefficiency and leads to a misallocation of scarce resources.

  1. Government can award subsidies to firms, but this may protect inefficient firms from competition and create barriers to entry for new firms because prices are kept ‘artificially’ low. Subsidies, and other assistance, can lead to the problem of moral hazard.

  2. Taxes on goods and services can raise prices artificially and distort the efficient operation of the market. In addition, taxes on incomes can create a disincentive effect and discourage individuals from working hard.

  3. Governments can also fix prices, such as minimum and maximum prices, but this can create distortions which lead to:

  4. An economic scenario that occurs when there is an intervention in a given market by a governing body. The intervention may take the form of price ceilings, price floors or tax subsidies. Market distortions create market failures, which is not an economically ideal situation.