3.1 Reasons for government intervention in markets

Because public goods are non-rival and non-excludable, individuals can benefit without paying, so private markets may underprovide or not provide them at all.

Government can finance provision through taxation, direct production or contracts, but must estimate demand, cost and the socially valuable quantity. Provision still has an opportunity cost.

A publicly funded flood-warning system can protect many households simultaneously; charging each household separately may fail because people can wait for others to contribute.

Public provision does not mean unlimited free supply or zero cost; scarce labour and finance are still used.

Merit goods may be under-consumed and demerit goods over-consumed when consumers lack relevant information about benefits or harms. Policy aims to narrow the gap between private choices and social welfare.

Information campaigns, subsidies, taxes, regulation and direct provision can be combined. Each has costs, enforcement issues and possible unintended effects.

Subsidised vaccinations and clear risk information can raise uptake; excise taxes and age restrictions can reduce tobacco consumption, but neither guarantees the exact efficient quantity.

Policy should not be justified by labelling a good “good” or “bad” alone; identify the information failure and predicted response.

A maximum price set below equilibrium is a price ceiling that can create excess demand; a minimum price set above equilibrium is a price floor that can create excess supply.

The effect depends on whether the control is binding. A non-binding ceiling above equilibrium or floor below it leaves the market outcome unchanged; enforcement and allocation mechanisms determine who gains access.

A binding rent ceiling may reduce the price paid by some tenants but create a shortage and non-price allocation; an agricultural support price can create unsold surplus.

A legal price is not automatically binding, and a price ceiling does not guarantee every willing buyer can obtain the good.