A New Perspective
4. 4.1 Competitive markets and price regulation INTRODUCTION Spillovers or externalities can result in a social (Kaldor–Hicks) welfare loss, even under perfectly competitive conditions, and as pointed out in Chapter 2, may call for government intervention in markets. But actual government intervention in competitive markets is not limited to correcting market operations to allow for externalities. There is considerable government interference in competitive markets even when externalities do not occur. The purpose of this chapter is to consider how and why governments interfere in competitive markets even when externalities are absent and to outline the economic eﬀects that such intervention has. Government policies to maintain, to limit, or to stabilize product or factor prices, and government regulation of prices in international markets are examined. Before considering the eﬀects of such intervention, it is worthwhile to digress and clarify the meaning of diﬀerent types of market competition. This is because this chapter concentrates on government intervention in perfectly competitive and purely competitive markets; intervention which in the absence of externalities is liable to result in a Kaldor–Hicks social welfare loss. Deﬁning the state of competition in an industry and in markets generally is not as straightforward as it may appear at ﬁrst sight. It is likely to depend on the ease of entry of new ﬁrms into the industry, the number of producers in the industry, and the ease with which other products can be substituted for those of the industry. An industry tends to...
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