Strategy Survival Guide

Strategy Survival Guide Version 2.1
Prime Minister’s Strategy Unit
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Strategy Skills > Appraising Options
Rationale for government intervention
> in practice
Identifying the rationale for government intervention is crucial to deciding when – and in what ways –
governments need to get involved.
The current draft of the HM Treasury Green Book identifies two basic justifications for government
intervention:
• The enhancement of economic efficiency by addressing problems with the operation of markets and
institutions
• The achievement of a social objective, such as promoting equity.
The existence of a problem does not in itself justify government intervention. Government itself does not
function perfectly, and any form of government intervention may impose costs. This means that even when
markets do not work effectively to deliver desirable goals, government must compare the costs of failing to
deliver those goals against the potential costs of the intervention.
There are four key stages to justifying the rationale for government intervention:
1. Identify the set of policy goals to be achieved
2. Identify why these goals may not be delivered without government activity
3. Identify what actions are available to government in order to deliver the desired outcomes
4. Consider whether the costs of government intervention are justified.
1. Identify the set of policy goals to be achieved:
This involves an assessment of the government’s strategic goals and objectives, and the way in which they
are translated to individual policy areas.
2. Identify why these goals may not be delivered without government activity:
Economists identify two broad types of reason why government activity may be required:
(I) Market failure, of which there are several types:
• Imperfect competition (market power). Economic theory demonstrates efficient outcomes will be
delivered only where markets are actually or potentially competitive. As soon as there is an element
of monopoly (on the side of the seller) or monopsony (on the side of the buyer) power that can be
exercised, a less efficient outcome will occur. This may arise because of the natural characteristics
of the market (e.g. very high costs of entry) or through strategic behaviour by incumbents (e.g.
predatory pricing).
• Externalities. Externalities result when a particular activity produces benefits or costs for other
activities that are not directly priced into the market. When this happens, the amount of the particular
activity that takes place will generally be inefficient. Externalities can be "positive" or "negative". An
example of a positive externality is the spill over effect into other areas that can occur as a result of
research and development activity. A company or research institution will generally decide its level of
R&D on the basis of the benefits that it can capture – ignoring benefits that might occur elsewhere.
An example of a negative externality is pollution of the environment. A company or individual may
reduce its own costs by failing to implement pollution controls, but this will generally impose costs on
those affected by the pollution..
Strategy Survival Guide – Strategy Skills
Page 178