Tax incentives for construction market failure?

[Firefly]

Yesterday's Sunday Business Post

‘‘Consideration will be given to the selective application of new tax incentive measures in areas of evident market failure, particularly with National Spatial Strategy gateways and hubs.”

The regional towns designated as gateways in the strategy were Dundalk, Sligo, Letterkenny and a linked gateway comprising the midland towns of Athlone, Tullamore and Mullingar.

A spokesman for the Department of Finance confirmed that proposals were expected before the budget from the Department of the Environment.


- Do ye think this is market failure?????

 

[markowitzman]

Re: Tax incentives for construction Market Failure??

ah sure a few of the lads in the tent in Galway asked the gov to set up the merrygoround again as the builders/developers see things cooling!

 

[Jaid79]

Yesterday's Sunday Business Post

‘‘Consideration will be given to the selective application of new tax incentive measures in areas of evident market failure, particularly with National Spatial Strategy gateways and hubs.”

The regional towns designated as gateways in the strategy were Dundalk, Sligo, Letterkenny and a linked gateway comprising the midland towns of Athlone, Tullamore and Mullingar.

A spokesman for the Department of Finance confirmed that proposals were expected before the budget from the Department of the Environment.


- Do ye think this is market failure?????

What sort of tax incentive would become available?

Jaid

 

[room305]

- Do ye think this is market failure?????

The government has no business trying to correct some perceived failure of the market.

If I grew apples and sold an apple juice product for €15 a litre, which few people showed any inclination to buy - there would be no talk of "market failure". People would recognise the problem for what is - my product was priced higher than the market was willing to pay. Either I increase the quality or decrease the price, or both.

Of course, as we know, house building is not subject to the usual laws of supply and demand.

 

[Jaid79]

The government has no business trying to correct some perceived failure of the market.

If I grew apples and sold an apple juice product for €15 a litre, which few people showed any inclination to buy - there would be no talk of "market failure". People would recognise the problem for what is - my product was priced higher than the market was willing to pay. Either I increase the quality or decrease the price, or both.

Of course, as we know, house building is not subject to the usual laws of supply and demand.

Why? Are you been ?

Jaid

 

[MOB]

"The government has no business trying to correct some perceived failure of the market."

A bit of an overstatement surely. Surely one of the main reasons for having a state sector at all is the belief that an unrestricted free market would fail to deliver important elements of infrastructure, education, healthcare, employee protection, protection of the environment etc. While many disagree on what constitutes an appropriate amount of government interference in the market, there is no country in which the government does not address perceived market failure to some extent; this is in fact exactly what government is supposed to do.

 

[room305]

A bit of an overstatement surely. Surely one of the main reasons for having a state sector at all is the belief that an unrestricted free market would fail to deliver important elements of infrastructure, education, healthcare, employee protection, protection of the environment etc. While many disagree on what constitutes an appropriate amount of government interference in the market, there is no country in which the government does not address perceived market failure to some extent; this is in fact exactly what government is supposed to do.

It is one argument to have publically-funded state bodies that deliver services that the public do not wish to entrust entirely to the private sector - infrastructure, healthcare, policing, social housing etc.

It is something else entirely to have the government tamper with the market because it decides it doesn't like the price the market has set. Why do we allow markets to set the price in the first place? Why not have the government change the prices for anything they are unhappy with?

Markets allow for the most efficient allocation of resources because people respond to the price signal. If something is in short supply, the price will increase and production will be increased to meet demand. If a good is in oversupply, the price will fall and production will be decreased. That's why there has never been a famine in a free-market economy.

I stand by my statement - the government has already exacerbated the situation through continual tinkering with the market. A better case could be made for intervening if prices were rocketing in these areas and for some reason the demand/supply balance could not be redressed through normal market mechanisms (usually as a consequence of some other government intervention or other). Acting to increase supply now when the market is clearly signalling an oversupply is madness.

By bailing out their friends at the expense of the taxpayer I can confidently predict that not only will this attempt end in dismal failure but it will cost us a lot of money. I for one think I'm grossly underpaid and wouldn't mind if the government stepped in to correct the perceived market failure of my salary ...

 

[ubiquitous]

The government has no business trying to correct some perceived failure of the market.

If I grew apples and sold an apple juice product for €15 a litre, which few people showed any inclination to buy - there would be no talk of "market failure". People would recognise the problem for what is - my product was priced higher than the market was willing to pay. Either I increase the quality or decrease the price, or both.

Of course, as we know, house building is not subject to the usual laws of supply and demand.

I don't agree. As a student in Galway in the mid-1980s I found myself walking home about 1am one night through Shop Street and Quay Street. Quay Street was absolutely deserted and was in a state of semi-dereliction, so much so that I genuinely feared for my safety. At the time, there were similarly "dodgy" areas in every large town in Ireland. The transformation of these areas was triggered by tax breaks that incentivised the redevelopment and repopulation of these areas. I don't think anyone could argue that this was not a good thing.

Whether tax incentives have been over-used or abused in the meantime is a separate issue. The point is that government intervention in the market is sometimes worthwhile and indeed absolutely necessary.

 

[room305]

I don't agree. As a student in Galway in the mid-1980s I found myself walking home about 1am one night through Shop Street and Quay Street. Quay Street was absolutely deserted and was in a state of semi-dereliction, so much so that I genuinely feared for my safety. At the time, there were similarly "dodgy" areas in every large town in Ireland. The transformation of these areas was triggered by tax breaks that incentivised the redevelopment and repopulation of these areas. I don't think anyone could argue that this was not a good thing.

Whether tax incentives have been over-used or abused in the meantime is a separate issue. The point is that government intervention in the market is sometimes worthwhile and indeed absolutely necessary.

Section 23 relief was introduced in 1981 so that's a fairly loose definition of "triggered". How would you define "over-used or abused" - do you mean as in fraudulently applied for, or do you simply mean too many people availed of the incentive?

I don't consider government intervention in the market place ever to be effective or necessary. Any business is either worthwhile - in which case it will go ahead regardless of tax breaks - or not worthwhile, in which case the government has no business encouraging it.

Another problem with the government implementing tax breaks on some developments is that the market distortion can lead to overbuilding in areas with no demand, leading to an undersupply in areas with a high demand.

These days it seems almost every venture needs a tax break before it can get going (because otherwise it is starting at an immediate disadvantage to industries with tax breaks). The army of civil servants trying to monitor and implement tax breaks continues to grow and hordes of tax consultants spend countless hours figuring out how trying to abuse them.

Before you know it, the government will be directing everything and we'll have a centrally planned economy.

 

[ubiquitous]

Section 23 relief was introduced in 1981

There was no evidence of any take-up of Section 23 (or property development of any sort) when I lived in Galway up to 1988.

so that's a fairly loose definition of "triggered".

Not necessarily.

How would you define "over-used or abused" - do you mean as in fraudulently applied for, or do you simply mean too many people availed of the incentive?

The property tax breaks outlived their usefulness in most (but not all) areas. Most of them should have been scrapped around 1997. There was never much of a case for the Rural Renewal Relief or the Seaside Resorts Scheme, among others.

These days it seems almost every venture needs a tax break before it can get going (because otherwise it is starting at an immediate disadvantage to industries with tax breaks).

Really? My own neck of the woods is bursting at the seams with new property developments, and new service-sector businesses, none of which have benefitted from tax breaks.

The army of civil servants trying to monitor and implement tax breaks continues to grow and hordes of tax consultants spend countless hours figuring out how trying to abuse them.

A slight exaggeration, perhaps?

 

[room305]

There was no evidence of any take-up of Section 23 (or property development of any sort) when I lived in Galway up to 1988.

That's the point. They didn't taken up until a decade or more after their introduction when it was profitable to do so, at which point they were redundant.

 

[MOB]

"I don't consider government intervention in the market place ever to be effective or necessary. Any business is either worthwhile - in which case it will go ahead regardless of tax breaks - or not worthwhile, in which case the government has no business encouraging it."

This is just not true, and it does not promote useful debate when such a polarised view is adopted. As a business proposition, it is never going to be worthwhile to open public libraries in deprived areas - they just can't pay their way. It is never going to be worthwhile to carry out environmental improvements to farmland (as subsidised by REPS schemes and such like) because these improvements add nothing to farm profits. It is never going to be worthwhile to go into business in a market where there is a dominant player with deep pockets who can undercut you by selling below cost for long enough to put you out of business (a practice which government - by its interference in the market - makes illegal).

The free market does not deliver effective policing. The free market does not deliver effective fire brigade services (though of course fire brigades were originally a private sector endeavour). The free market does not deliver universal education (though in fairness I have seen some well-reasoned arguments that it could). The free market does not deliver effective competition in many areas where it is clear that the greater good would be served by ensuring such competition.

In short, is quite obvious that there are some markets where government intervention is both necessary and desirable. It is also quite obvious that there are markets where government intervention is neither necessary nor desirable. The 'government interference in the market' type issues which deserve reasoned debate may therefore be loosely categorised as being:

1. Markets where government do not interfere enough, and where it is argued that they should do more.

2. Markets where the government interfere too much and where it is argued that they should do less.

 

[ang1170]

Markets allow for the most efficient allocation of resources because people respond to the price signal. If something is in short supply, the price will increase and production will be increased to meet demand. If a good is in oversupply, the price will fall and production will be decreased. That's why there has never been a famine in a free-market economy.

What a crass statement. I suggest you check out your history books (hint: Ireland, 1840s).

 

[Bronte]

Re government intervention, I see a Section 50 student accommodation recently built (in last 2 years I guess) that is advertised on the Daft website as a 4 bed student accommodation and the estate agents say it's easily convertable into a 2 bed unit. It's on a street where I don't see the need for government intervention but interesting to note that it seems it would be better to convert it into a 'normal' apartment than a student room type accommodation and so recently after having been built it seems strange to me. Is this happening to a lot of the Section 50 properties or maybe this is a one off. Certainly seems to be a failure of the government policy. Don't they have rules that prevent this.

 

[room305]

What a crass statement. I suggest you check out your history books (hint: Ireland, 1840s).

Why is my statement crass?

An occupied colony where the majority of the people were suffering religious oppression and wealth confiscation by the occupier (i.e. Ireland in 1845) is a fairly perverted form of a "free market economy". Might be no harm to have a re-read of those history books yourself.

 

[ubiquitous]

An occupied colony ...

Ireland was an integral part of the United Kingdom in the 1800s. It was not a colony in any sense of the term.

 

[room305]

Ireland was an integral part of the United Kingdom in the 1800s. It was not a colony in any sense of the term.

It must have been considered a colony in some sense of the term as the country was ruled by a centralised London government in which Irish Catholics (90% of the population) were denied representation. The Penal Laws were only repealed in the late 1820s, denying Catholics the right to buy land, forcing them to continually subdivide their holdings which in turn was one of the leading causes of the famine.

Without getting into an endless discussion of the history of the Irish famine I think it's fair to say that the political system in place was decisively undemocratic and the trading markets were anything but free. It might have been clearer if I said that there was never been a famine in a country with free markets and representative democracy, something I consider a pre-requisite for a liberal economy.

 

[room305]

"I don't consider government intervention in the market place ever to be effective or necessary. Any business is either worthwhile - in which case it will go ahead regardless of tax breaks - or not worthwhile, in which case the government has no business encouraging it."

This is just not true, and it does not promote useful debate when such a polarised view is adopted. As a business proposition, it is never going to be worthwhile to open public libraries in deprived areas - they just can't pay their way. It is never going to be worthwhile to carry out environmental improvements to farmland (as subsidised by REPS schemes and such like) because these improvements add nothing to farm profits. It is never going to be worthwhile to go into business in a market where there is a dominant player with deep pockets who can undercut you by selling below cost for long enough to put you out of business (a practice which government - by its interference in the market - makes illegal).

I'm not lobbying for anarchy nor am I pretending that free markets are the natural order of affairs. Of course few private enterprises will engage in ventures considered to be unprofitable. However, charitable institutions, religious organisations or the government sometimes decide to fill that gap and fund an unprofitable venture they deem worthwhile from tax revenue or donations. So they build a library in a disadvantaged area. No harm done.

If the government decided that the reason for a dearth of private libraries in disadvantaged areas was that books were overpriced and took measures to force the price lower, this would be interfering with the market. It would also cause a shortage of books and a black market for books at the non-government set price. Similarly, if the government decided to incentivise private library building in disadvantaged areas by providing tax breaks to private library builders, this can only be seen as interfering and usually has unforeseen consequences (rampant over-building for one).

As for environmental improvements to farms being unprofitable, this is as a result of an externality. Polluting the environment - say publically held rivers, or the air, is a cost borne by everyone but the benefits (increased profit/production, lower cost etc.) are accrued directly by the farmer. Hence the incentive to pollute. The solution is simply to try and remove these negative externalities to avoid a "tragedy of the commons" effect, with regard the environment.

I am totally against any below cost selling bans (I thought these were no longer illegal?). The threat of a new entrant can often be enough to keep costs down even in cases where there is only one provider - Ryanair is a good example of this in practice.

The free market does not deliver effective policing. The free market does not deliver effective fire brigade services (though of course fire brigades were originally a private sector endeavour). The free market does not deliver universal education (though in fairness I have seen some well-reasoned arguments that it could). The free market does not deliver effective competition in many areas where it is clear that the greater good would be served by ensuring such competition.

I am of the personal perhaps unsurprising opinion that the government would be best getting out of the education game. The enforced one-size-fits-all solution provided is nothing short of barbaric. I've only every seen what could be described as a private police force in operation once when I lived in the US, and it seemed to work as well as any other. I'm not sure it is necessarily the most desirable prospect but I think it could be made to work. I'm not quite clear what you mean by "the free market does not deliver effective competition in many areas where it is clear that the greater good would be served by ensuring such competition" - surely competition is always desirable? Perhaps you could illustrate with an example?

In short, is quite obvious that there are some markets where government intervention is both necessary and desirable. It is also quite obvious that there are markets where government intervention is neither necessary nor desirable. The 'government interference in the market' type issues which deserve reasoned debate may therefore be loosely categorised as being:

1. Markets where government do not interfere enough, and where it is argued that they should do more.

2. Markets where the government interfere too much and where it is argued that they should do less.

I'm not advocating the government should stand idly by while the Coca-cola factory arms itself and forces the residents of Louth to increase their Coca-cola consumption at gunpoint. The rule of law must be respected. However, the government has no business getting involved in price-fixing, or attempting to "direct" individual markets through taxation policy.

 

[MOB]

"I'm not quite clear what you mean by "the free market does not deliver effective competition in many areas where it is clear that the greater good would be served by ensuring such competition" "

What I mean is, there are markets where - due to high costs of entry, large economies of scale, or other reasons - the emergence of a dominant player, or a small group of dominant players, is so commonplace as to be almost inevitable unless there is government interference to prevent this. In other words, the unregulated free market does not result in price competition. Two examples of this would be the cement industry (and indeed the related readymix and aggregates industries) and the plastic components industry (i.e. cheaper commodity type plastic products). In most western democracies, these industries have to be heavily policed by Competition Authorities.

Regarding pollution and the comment that "The solution is simply to try and remove these negative externalities to avoid a "tragedy of the commons" effect, with regard the environment." that is all very well, but how exactly does one 'remove a negative externality' whilst not interfering in a market? Is it not the case that this is a situation where it is demonstrably appropriate for government to interfere in the market?

"surely competition is always desirable? Perhaps you could illustrate with an example?"

I am reminded of the old cliched joke from student debating days "I propose that there should be a second Monopolies Commission". Google 'natural monopoly' and you will find any amount of useful reading. Here is a good starting point: [broken link removed]

 

[ang1170]

Without getting into an endless discussion of the history of the Irish famine I think it's fair to say that the political system in place was decisively undemocratic and the trading markets were anything but free. It might have been clearer if I said that there was never been a famine in a country with free markets and representative democracy, something I consider a pre-requisite for a liberal economy.

If the economy of the time wasn't a free market, what exactly was it?

The UK in the 19th century was probably one of the purest forms of free markets that has ever existed.

You mentioned nothing about representative democracy in your original point. It's not clear how the political organisation of a country would have any impact on the economic point you were making (apart from the obvious, that a democratic government would be forced to intervene in the "free market" to prevent or resolve a crisis: but that kind of negates the point you were making about free markets).