Cambridge International as and a level Economics Ebook

Problems of policy conflict
Government intervention in the running of the economy 
is oft en justifi ed by the need to reduce inequality. 
However, it is possible that government intervention might 
sometimes increase existing inequality. Th
is is simply 
understood by recognising that the imposition of any tax 
will have a distributional eff ect. Th
us, a tax on energy 
use that aims to reduce harmful emissions of greenhouse 
gases will have diff erent eff ects on diff erent groups of 
people. If the tax is on the use of domestic fuel, then older 
members of society may bear the greatest eff ect as they use 
proportionately more domestic fuel for heating than others 
in society. Th
is could be seen as unfair and increasing 
inequality in society.
It is also possible to see how government failure 
can occur in the case of subsidies on the costs of 
fossil fuels. Th
ese encourage production and their use 
in coal-fi red power stations, both of which contribute 
increased environmental pollution. Th
e subsidies might 
enhance competitiveness of manufacturing industries 
Spicejet, a low-cost airline in India
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Chapter 8: Government microeconomic intervention

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and keep workers in jobs but they are completely 
inconsistent with the need for more sustainable 
development policies.
A fi nal example, again including sustainability, is in 
the case of air transport. In the US, EU and increasingly in 
Asia, markets have been deregulated. Th
e eff ects have been 
Are agricultural subsidies causing more harm than good?
In 2001 at the Doha Round of talks, representatives from 
many developing countries were like-minded to heavily 
criticise the huge agricultural subsidies being paid by the US 
and the EU to their farmers. They argued very strongly that 
high subsidies force prices down, reduce farm incomes and 
maintain poverty in developing economies.
What a diff erence 12 years makes! The BRIC countries 
especially have increased their own agricultural subsidies the 
fastest of all. China, for example, spent more than $160 billion 
in 2012. This was much, much higher than the $19 billion 
spent by the US and the $67 billion spent by the EU. Brazil’s 
subsidies to its farmers have increased rapidly since 2007 
to $10 billion; India has spent more than the US in its price 
support policy for domestically produced wheat and rice.
So, where is the government failure? The point is that if these 
subsidy policies are done well, they can support innovation, 
feed the hungry, produce surpluses for export and pull millions 
out of poverty while helping to build a stronger middle class. 
Once this has been evidenced then the subsidies should be 
removed; they should not be seen as long-term support for 
ineff icient farmers, in which case, innovation will be stifled, 
production remain uncompetitive and farmers will be even 
more dependent on the government. As a result, many will end 
up doing less for more. A clear case of government failure.
Source:
Adapted from J. Clay,
 The Guardian
, 8 August 2013.