Economic Policy Analysis
Week 1
fourth section
Dr. Ulrike Hotopp
Recap from section 3
• Policy makers set objectives as to what they aim to achieve in
Government
• Markets fail and deliver inefficient outcomes
• Inequalities are part of political commitments and need to be
addressed.
How Government
intervenes
Regulation
Regulated Industries
Regulations (e.g. legislation)
Regulated Industries
• Energy, water, postal services, railway network – have a natural
monopoly character
• Other industries deemed to have a public interest aspect
(Communications, incl the press, TV, etc) are regulated based on
cultural, educational etc justifications
• Regulations include:
• Price, investment, quality
• Content of programmes (TV)
Regulation as legislation
Regulations lead to costs and benefits.
• Setting rules what They provide a legal framework and
individuals and firms can protection, but also lead to the need for
and can’t do. compliance and enforcement.
Businesses spend time on informing
• Covers almost every aspect themselves of relevant regulations,
of life: construction complying with them etc. This can
regulations, H&S, labour increase prices for consumers.
In the UK Impact Assessments, done by
market, food labelling, etc. economists in Government, assess costs
• Regulation allows or and benefits of new regulations.
prohibits goods, services,
behaviour etc.
Other forms of
intervention
Standards
• Can be understood as a form of
regulation but are not mandatory.
• Provide information about a product or
service. Buyer expects quality or another
characteristic (which can be enforced)
and is willing to pay for it.
• Examples: Length of 1 m, Environmental
Management Standards
• British Standards Institute sets standards.
Creation of markets
• Where externalities exist it is sometimes possible to create a market
and allocate property rights.
• For example: Carbon trading (see next slide or
[Link] – Carbon
markets create property rights for the emission of CO2. The overall
amount of emission is fixed and can be reduced over time. Exist in
Europe, Australia, South Korea, Japan, California etc.
• Voucher schemes for childcare – provides parents with a “currency”
which can only be spent on childcare.
Source: World Bank; [Link]
Provision of Goods and Services
• Examples: Defence
• Defence is a non-rivalrous and non-excludable public good.
• Other examples include Education – positive externality and equity
arguments
• Different countries have different approaches to the provision of
public goods.
Summary: Market failures, Equity
and intervention –preferred
solutions
Market Failure and Equity Intervention
• Equity • Taxation
• Imperfect information • Subsidies
• Moral Hazard • Regulation
• Market power • Standards
• Externalities • Creation of Markets (tradeable
• Public goods permits)
• Provision of goods and services
Summary: Market Failures, Equity and intervention –
however, the preferred solution is not always
feasible
Market Failure and Equity Intervention
• Equity • Taxation
• Imperfect information • Subsidies
• Moral Hazard • Regulation
• Market power • Standards
• Externalities • Creation of Markets (tradeable
• Public goods permits)
• Provision of goods and services
Or do nothing?
Barriers and problems with
Government Intervention
• What information is required and which interventions will be most
effective to deliver policy objectives?
• What information is required to fully address the inefficiencies in the
market?
• What distortions will be created leading to unintended negative
consequences?
• Which other interventions interfere with the newly proposed
intervention?
Think-Break 3
• What types of Government intervention have you come across in your
work?
• Take 2 minutes to list them before continuing with the presentation
