Theme 1: Government intervention Flashcards
Why do governments intervene?
To correct market failure
Two types of indirect tax
Ad valorem and specific
Ways in which the government corrects market failure?
Indirect tax, subsidies, max and min prices, tradeable pollution permits, provision of public goods, provision of information and regulation.
Where does max price have to be?
Set below the free market price
Where does min price have to be?
Set above the free market price
Key example of minimum price
national minimum wage
Advantages of tradeable pollution permit
Benefit environment, government raise revenue and raises revenue for greener firms.
Disadvantages of tradeable pollution permit
Firms may relocate.
Pass higher costs onto the consumer.
Competition could be restricted if permits create a barrier to entry.
Expensive to monitor.
How does state provision of public goods correct market failure?
Government provides the public goods that have positive externalities.
How does provision of information correct market failure?
Government’s ensure that there is no information failure so consumer and firm can make informed economic decisions.
How does regulation correct market failure?
The government could use laws to ban consumers from consuming a good that has negative externalities.
Net welfare loss
An overall loss of economic welfare when compared to the starting position
4 reasons for government failure
- Distortion of price signals
- Unintended consequences
- Excessive administrative costs
- Information gaps
Distortion of price signals
The actions of government which distort the operation of the price mechanism and so misallocates resources.
unintended consequences
the unexpected and unplanned results of a decision or action
