Friday, 18 November 2011

Government intervention that works

One of the blogs I've been reading recently is Munguin's Republic. One of his recent posts made me stop and think.

You see, in addition to his perfectly justifiable complaint about the BBC apparently not realising Scotland exists when it comes to news reports, the situation he mentions is quite interesting.

You see, in the Western Isles of Scotland, petrol has to be imported from the mainland, which means it costs a lot more - in fact, they've got possibly the most expensive petrol prices in the world. In recognition of these unique circumstances, the government recently waived part of the fuel duty on petrol on the islands in order to bring the prices in line with the mainland. Unfortunately, the petrol stations on the islands all immediately raised their prices by a corresponding amount.

So all that's happened is that the petrol companies are making more money while islanders are stuck paying high prices and the government has lost revenue.

And this I think illustrates a flaw in both the two "either or" models of government intervention.

You see, if you spoke to a conservative about this, they'd say that the government should only intervene by lowering the tax, and that if the companies refused to lower their prices then free market forces would mean another company would open up petrol stations and undercut them. Except, of course, this won't happen since there are only a few big fuel companies and why would they undercut each other when they can all charge the higher price and profit from it?

And if you were to speak to a socialist, they'd probably say that the government should intervene by lowering the tax and then, if the companies refused to lower their prices, by setting up a government pwned petrol company to run the petrol stations and remove the evil forces of capitalism from the land all together. The only problem with this is that it would be immensely expensive, more bureaucratic and inefficient and would be run by civil servants hundreds of miles away from the islands.

This may be exagerrating things slightly, but those are generally the two models of government intervention put forward by Conservatives and Labourites respectively. Either the government should leave it all to the private sector or the government should take over everything. Those are the only two options - or so they'd have you believe anyway.

Personally, I think that there's a third option, drawing on the liberal philosophy. You see, if it were up to me, what I'd do is offer a government loan to the islanders to set up a customer and employee owned co-operative on the island to run its own petrol stations and to compete with the big fuel companies by charging fair prices. And, because it would be based locally and run by local people, it would be far more responsive to their needs. Also, any profits it made would be redistributed amongst the members of the co-operative (i.e. the islanders), as opposed to shareholders and executives profiting from over pricing people living in what is, essentially, a captive market.

And, as it'd be run as a business, it would be far more efficient than a state run company and would be able to make a profit to pay off the government loan. So the taxpayers would get their money back and the islanders would get cheaper fuel prices.

Now that's the model of government intervention I belive in: intervening to empower local communities to take control of their own lives. That's a core part of the liberal philosophy and, in my humble opinion, one far superior to abandoning people to the not-so-tender mercies of unbridled capitalism or subjugating them under the heel of the centralised, overbearing state.


  1. I am an Economics teacher and I have been looking very hard to find positive examples of Government market intervention and by that I mean examples where just about everybody could agree that a government did a good thing by intervening. The closest I've found is your post! Unfortunately the intervention didn't ACTUALLY happen :-) Can you think of any positive Government interventions? (Don't mind which country and/or party) I'd really appreciate your thoughts.

  2. Only thing I could think of off the top of my head is the coal mining industry in the early twentieth century. It was nationalised during both world wars and denationalised afterwards. The best example might be the way in which conditions, productivity and safety at mines improved during the first world war due to government control and then deteriorated afterwards.

    Or you could possibly look at the roads. Originally they were all private toll roads before being bought up and nationalised and you can probably argue that as a result we have a much better road network in the UK.

    As for more recent intervention, I think one example that could be looked at is the renewable energy sector where relatively limited government intervention has been used to kickstart the growth of the sector far beyond what would have been achieved by the markets alone.

    All that being said, I'm just an engineering student though so my knowledge of economics is pretty shaky :)


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