1.5.2 Government intervention and failure Flashcards
What are the purposes of government intervention?
- To reduce the impact of external costs
- To ensure under-produced products are available to all
- To ensure that over-consumed products are discouraged or prevented
- To reduce the impact of anti competitive business behaviour so that prices are fair to the consumer.
What is regulation?
Legal and other rules that apply to organisation.
Regulation is a type of legislation that defines the rights and responsibilities of individuals and organisations.
How can governments use regulation?
To influence the extent to which negative externalities affect the quality of life in our society.
What is legislation?
When the government pass new laws to restrict activities that create negative externalities and over consumption.
If businesses fail to comply with legislations what will happen?
They will receive a penalty
What are the advantages of Legislation?
- Expected standards are clear
- Failure to comply has consequences
- The consequences are known
What are the disadvantages of Legislation?
- The law may be difficult to enforce
- Enforcement can be expensive
- Penalties may not deter behaviour
What is indirect taxation?
Adding a tax to products that are over-produced, making them more expensive to consume and reducing demand.
Explain the tax diagram
Supply shifts to the left from S1 to S2
Price increases from P1 to P2
Quantity falls from Q1 to Q2
This is because tax is put in place to reduce the quantity being supplied and to increase the price of the product as it is over-consumed.
Why do governments use grants and subsidies?
To make under-consumed products cheaper and to encourage increased consumption.
What are voluntary agreements and how can the government use them?
The government can try to persuade businesses within a specific industry to change the way they behave and adopt common codes of practice that reduce harmful externalities.
What is a problem with voluntary agreements?
Not all businesses will sign up particularly if it involves extra costs and subsequent loss of competitiveness.
What is government failure?
When the result of government intervention is a new and different inefficient allocation of resources, requiring further intervention.
What is insufficient information?
Governments do not always have enough information to make good decisions
What is distortion of price signals ?
This can occur when the government gives out subsidies to firms. This can cause some firms to become reliant on government subsidies rather than trying to cut down waste in order to become more competitive in the market.
