Readers Question: I am studying AS level economics and I have a homework which i’m stuck on. I was wondering what are the pros and cons of the government intervening in market failures such as those resulting from the immobility of labour, negative externalities and greater income inequality, following the closure of factories.
It’s a difficult AS question. Some ideas might include:
Advantages of Government Intervention
The existence of Negative externalities leads to overconsumption. A negative externality causes a harmful effect to a third party. Therefore the social cost is greater than the private cost. However, people ignore the costs to others and so in a free market there is overconsumption. Negative externalities of a factory closing down include the costs to the rest of society in the nearby town. It is not only workers who are adversely affected but local shops.
Immobility of labour can lead to geographical unemployment. i.e. jobs are available but workers find it difficult to move to these areas. Government intervention can subsidise firms who move to areas of high unemployment or subsidise workers who move to areas of low unemployment. This can help overcome market failure in the labour market and reduce the problem of geographical unemployment resulting from a factory closing down.
If workers are made unemployed when a factory closes down they will have no income creating great inequality therefore there is a justification for paying benefits to workers.
Arguments Against Government Intervention.
It is expensive to subsidise firms and workers to move. Demand may be quite inelastic because people have family ties therefore, the money may be better spent on retraining workers.
If the government do too much to reduce income inequalities it may reduce incentives for people to look for new jobs. It may create a poverty trap.
It is hard to measure the negative externalities of a factory closing down, they may be less than estimated. Given time new firms may take advantage of the surplus labour.