By Nelson Toh
One unique sell-point about myself as a part-time Economics tutor, is that I hold a full-time day-job.
For the most part, tutors tend to be either full-time tutors, or students/under-graduates, and I like to think that I can offer more to students by sharing with them my varied work experiences.
One of my favourite topics, is how “A” level Economics tend to portray the Free Market with Government Intervention in too optimistic a light.
We should be wary – government interventions can come with high costs and should be utilised with caution.
Who is the Government?
Students tend describe the Government in vague terms, suggests that the Government in “A” level lore is an omnipresent singular entity that is benevolent, wields absolute power and is eternal (no shut-down condition).
Speaking of which, isn’t this what most of us would imagine to be “God“?
It might surprise some students to know, but the Government is actually staffed by mere mortals. Like you, and me.
I was a public servant myself for a time – I can assure you that the above is true.
What is a “Government Intervention”?
This happens when the government initiates an action that attempts to influence (through the price mechanism), or directly manipulate the allocation of goods and services in the economy. I have done a detailed explanation here.
At this point, students should understand that it is redundant to list “Government Intervention” as a policy option for the Command Economy. You can’t intervene with yourself unless you have a bipolar disorder!
For a period of time, I worked in the government of Singapore, as a regulator for Public Transport (yes, that extremely hot button issue), and I would illustrate my points based on my experience.
Public Transport is an essential service for the country, which according to most Economic theories, would be prime candidate for Market Failure because:
- Public transport generates tremendous external benefits in consumption – moving people across the nation efficiently generates collective benefits to the country that goes beyond personal benefits.
- If left to market forces, profit-maximising transport operators would raise prices to generate additional revenue, reducing access to less well-off people (i.e. inequality).
As you might therefore imagine, I had my work cut out for me, ensuring that the Public Transport service levels were adequate and affordable. This came both in the form of direct measures (minimum service standards) and indirect measures (subsidies).
You mean that government interventions aren’t the work of magic?
Of course not!
As previously discussed, government interventions are primarily formulated by gathering information about the market to derive knowledge about the actual versus the social optimal market output.
Yes – the usual “A” level notes will mention that gathering data and making sense of them will seldom lead to 100% accurate results. But they probably didn’t say a lot about how…
Government interventions can be painful.
I was reminded once again what being a regulator for Public Transport was like when someone posted this meme on Facebook.
In case you wonder, something similar befalls the regulators when train faults occur (except the rolling of dice). Funny, yet tragic.
Central to the premise of efficient government interventions is Perfect Information. Obviously this is not attainable in the real world.
Therefore the next best attainable scenario would be timely and meaningful information flows on demand from the transport operators to the regulator (me).
In reality however, this usually remained “attainable” rather than “practiced today”. The key reasons for this disconnect are:
- The information gap between the regulator and the operator since they are separate and distinct entities.
- The misalignment in goals between the regulator (maximum societal welfare) and the operator (profit-maximising).
The result to these is that the gathering of information by the regulator is no easy task. As a regulator, it probably wasn’t too far off to describe getting information from the operators as begging, stealing and borrowing.
At this point, the government can respond in 2 main ways (besides throwing dissenting voices behind bars):
- Hire more regulators
- Make the regulators work harder
Consequently, I joined as a regulator because they needed more manpower. (Point 1)
And then I was told – you need to work harder because you are serving the country’s interests. (Point 2)
Government Interventions can be costly.
The additional cost to Point 1 earlier is obvious.
But the costs incurred by Point 2 are less straightforward. Overworking workers often lead to high employment turnovers (i.e. more people quitting their jobs).
Unless knowledge is free-flowing (it is not) and people are perfectly substitutable (also not the case), this will lead to additional costs to the employer. Therefore, high turnover rates will lead to inefficiencies to the government and taxpayers will bear these costs.
On a separate point, have you worked on projects with your peers only to have a so-called “supervisor” who exhorts hard work but doesn’t do the heavy lifting?
Had the following thought ever crossed your mind? I think I can do the work faster on my own without his/her interference.
That is in fact, another cost incurred by society when government interventions are utilised to “correct” the market.
In the (unlikely) world where all stakeholders could be trusted to work together to achieve maximum collective benefits, high levels of government interventions may be considered to be leakage of resources that would prevent actual output from achieving its full potential.
Even worse – companies that are subject to interventions from the government often allocate resources to ensure compliance (or even “smoke” the Authority!). These efforts do not directly contribute to products for the intended market, and therefore represents a loss in societal welfare as well.
A study in USA showed that government regulations cost a whopping US$1.75T per annum – the equivalent of 13% of USA’s GDP for that year!
Long story short, students should be aware that government interventions are not without costs, nor are they magic pills in solving every kind of market failure. And yet these are important concepts that are often glossed over in the “A” level study materials.
In fact, the main reason why government interventions are popular solutions to problem statements in the exam, is that the command economy is not a palatable answer where we are (democracy ftw?), and the free market has serious market failures that need answers (other than the command economy)!
Are the costs justified?
That is a topic I would like to tackle in a future discussion.
For today, it suffices for students to know that the much touted model, where the free market’s price mechanism efficiently allocates resources and is complemented with government intervention, is not without costs and may not achieve perfect solutions policymakers so seek.
As usual, if you had found this article informative and useful, please do share it! If you wish to comment or ask questions, feel free to leave them as comments to this post.
For more information about my services as a JC Economics tutor, do visit my website here.