Market Failure and Government Intervention
( a shift upward of supply).
The greatest impact of antitrust is on the structure of a market. By interfering with mergers and acquisitions, the Antitrust agencies are trying to increase the number of suppliers in a market. This should generally lower market prices.
Subsidies and Taxation
Subsidies and taxation changes usually shift demand and supply curves:
Consumption Taxes shift the demand curve to the left. Such a shift therefore induces lower prices and quantities than would otherwise occur in the market. Needless to say, businesses particularly dislike this kind of market intervention by the government.
Consumption subsidies shift the demand curve to the right. Such a shift therefore induces higher prices and quantities than would otherwise occur in the market.
Production taxes shift the supply curve to the left. Such a shift therefore induces higher prices and lower quantities than would otherwise occur in the market.
Production subsidies shift the supply curve to the right. Such a shift therefore induces lower prices and higher quantities than would otherwise occur in the market.
The crucial factor is that the government is providing incentives to the market without inducing shortages or surpluses. Therefore the intervention is usually considered less onerous than regulation.
SECTION 5. GOVERNMENT FAILURE
Implicitly government has been assumed so far to be capable of correcting market failure. However, government involvement may make a market failure worse rather than better. Furthermore, the government may set up rules which lead to market failure. Finally government itself requires resources which can place a heavy drain on an economy. In this section we'll examine these government failures from the point of view of a former CEO of the Dupont Corporation, named Irving Shapiro .
Government intervention is costly. There are administrative costs of government intervention which reflect the costs of the agency personnel and other resources used by a government agency to intervene in a market. Then there are the compliance costs which are the direct costs experienced of complying with government regulations and interventions by the businesses themselves. Finally there are the efficiency costs which reflect the losses from using less efficient technologies and conducting less efficient businesses as a result of government interventions. These three kinds of costs must be weighed against the benefits of allowing the government to intervene.
There are a variety of different studies which are used to determine the desirability of