Market intervention

This article is about interventions in markets and market economies. For an alternative to markets as an allocative mechanism, see planned economy.

A market intervention is a policy or measure that modifies or interferes with a market, typically done in the form of state action, but also by philanthropic and political-action groups. Market interventions can be done for a number of reasons, including as an attempt to correct market failures, or more broadly to promote public interests or protect the interests of specific groups.

Economic interventions can be aimed at a variety of political or economic objectives, including but not limited to promoting economic growth, increasing employment, raising wages, raising or reducing prices, reducing income inequality, managing the money supply and interest rates, or increasing profits. A wide variety of tools can be used to achieve these aims, such as taxes or fines, state owned enterprises, subsidies, or regulations such as price floors and price ceilings.

Basic forms

Price Floor

See also: price floor

An demonstration of a binding price floor, leading to excess supply.

Price floors impose a barrier upon the minimum price at which a transaction may occur within a market. These can be enforced by the government, as well as by non-governmental groups that are capable of wielding market power.

Price Ceiling

See also: price ceiling

In contrast to a price floor, a price ceiling establishes a maximum price at which a transactions can occur in a market. A serious issue for price floors as well, but especially for price ceilings, is the emergence of black markets for the good or service in question.

Quantity Ceiling

Another possible form of market intervention is a quantity ceiling. This essentially ensures that only a certain quantity of a good or service is produced and traded on a market. An example of such an intervention includes emission permits or credits, whereby some market participants are able to offset their activity by paying other participants to reduce their own quantity.

Quantity Floor

While theoretically possible, quantity floors end up rarer in practice. Such an intervention insures that the market quantity does not fall below a certain level. This can come in the form of purchasing the marketed product, such as in the case of a jobs guarantee that ensures the utilisation of labour. It can also exist as a legally binding level of producer output also known as a production quota.

Taxation and Subsidisation

See also: tax and subsidy

Conventionally, taxation is used as a form of revenue generation. However, it has been observed as long ago as the 14th century that taxation can influence trade and suppress economic activity. In practice, this is sometimes seen as a desirable outcome, and taxes are levied with the intention of stymieing or limiting a market.

Economist Arthur Pigou used the concept of externalities developed by Alfred Marshall to suggest that taxes and subsidies should be used to internalise costs that are not fully captured by existing market structures. In his honour, these have been named Pigouvian taxes and subsidies.

Historical Examples

An example of Market intervention is the Economy of the US in the 1940s due to war. The war economy of the 1940s caused the United States government to take the lead in economic planning, by putting measures like centralized planning, price control, and rationing. In the post-war context, a large number of states had to resolve the issue of economic recovery, as a result of which the governments were entailed to engage themselves in infrastructure investment, social welfare, and industrial policy. In the post-war period, economists were in search of a way out of the deadlock and to incorporate Keynesian ideas in the classical economic theory, and as a result, the neoclassical synthesis emerged. Keynes' ideas of aggregate demand management were united with classical microeconomic theory by the economists, such as Paul Samuelson and John Hicks. This approach put a focus on the importance of market efficiency and rational behavior.

Examples of market interventions

Market interventions include:

• Bailouts pay (usually tax) money to people or organizations in financial difficulty; bail-ins transfer organizations from the ownership of their former shareholders to that of their creditors, cancelling the debt.
• Competition laws aim to increase competition and prevent monopoly and oligopoly
• Copyright grants a legal monopoly a creative work in order to encourage their production.
• Minimum wages create a price floor on labour.
• Monetary policy, such as currency intervention on the foreign exchange market.
• Nationalization transfers a privately held thing into government ownership
• Non-tariff barriers to trade restrict imports and exports by method other than direct taxes
• Patents are legal monopolies granted on practical inventions
• Privatization transfers a government-held thing into private ownership
• Quantitative easing occurs when the government buys government bonds, raising their price and lowering the return per unit price to people and institutions buying government bonds.
• Regulation bans, limits, or requires some market activities
• Subsidies and market/government incentives pay money to produce some desired change in recipients
  • Cross subsidization and feebates are subsidies funded by a linked tax
• Welfare is government support to individuals, in cash or in kind, often directed at basic needs

Levies

• Bank levies are when banks are required to give one-off payments to governments
• Capital levies require people or institutions to pay a one-time taxlike payment, to the government or some institution the government wishes to support; often paid only if above a certain level of wealth

Taxes

See also: List of taxes

Taxes are also market interventions.

See also

• Command economy
• Crowding out
• Developmentalism
• Development economics
• Dirigisme
• Indicative planning
• Monetary policy
• Palace economy
• Regulatory economics
• Rent-seeking
• Social interventionism

References

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