1.4 Government intervention Flashcards
Define government provision
Government provision is a government intervention method where the government tries to correct a market failure by supplying a good/service
Define government failure
When government intervention leads to an inefficient or misallocation of resources/ welfare loss
Imposition of tax: effect on price
P↑ , firms ↓ supply as CoP↑= P closer to socially optimum price P☆.
↑P= ↓ in external CoP
Firms have to pass on ↑P to consumers to maximise proft. Consumers maximise utility= ↓ in negative consumption externality
Imposition of tax: effect on quantity
Q↓= closer to socially optimum quantity (Q ☆) as private costs ↑
↓ in negative production externality
↓ deadweight loss that occurs from externality
Further from free market equilibrium (MPC=MPB) as firms prioritise private costs and private benefits
Define subsidy
Government grant to firms
Minimum price chains of reasoning
- P↑ (P1-P2)
- Disequilibrium- supply doesnt meet demand= EXCESS SUPPLY
- contraction along D (consumers cannot maximise utility with P↑)
- Extension along S (profit maximisers P↑ incentivise to ↑QS)
- CS falls as they are less willing to pay at ↑P and PS ↑
- Fall in negative consumption externality
- ↑in social welfare
How can minimum/ maximum pricing lead to government failure
Leads to distortion of price signals
* Absence of price mechanism (SIRA)- cannot eradicate excess supply/ demand
* Leads to misallocation of resoucres - inefficent
Minimum pricing definition
A price floor: government cannot legally sell good or service at a lower price
How might infomation gaps lead to food waste
- Food suppliers lack market info eg predicting size of harvests- dependednt on climate, pest control, disease/ time lags in growing crops
- Supermarkets lack market info eg predicting household demand- depends on tastes and fashion which might change/ impact of competitors
- Consumers lack market info eg uncertainity over how to store food or whether food is fit for consumption after sell-by-dates
In the UK, as seen from the extract, the PES for housing is less than 0.5.
What is the disadvantge of this
This means supply is inelastic, and therefore, prices have to increase severely in order to encourage a significant boost to housing supply.
With a growing population, this presents a problem. Over time, people will find it more and more difficult to get on the housing ladder, unless incomes increase dramatically so people can afford the high deposits necessary.
Why does government provide infomation for goods and services and what are the benefits
- Ensures economic units can maximise decisions when consuming and prodcuing G+S
- Allows consumers to make rational decisions = allocative efficiency
What does the provision of flood defences depend on
The success of provision of flood defences would depend on the government figures being correct. If the data is not accurate, and the government is not sure of the costs vs benefits, then the government should not intervene as there is a high risk of government failure. This would, therefore, waste taxpayer money and economic resources.
The government’s data could also be accurate, but it may have come at an extremely high cost to gather. This must also be taken into account. It is very difficult to calculate this accurately, because everybody has a different valuation of the environment so any flood damage can only be seen as an estimate and not a real figure.
Why might the quality of production carried out by a private firm be worse than that of the government.
The government is less likely to cut costs at the expense of quality and is likely to prioritise making their buildings safe for occupants. This is because the government’s objective is to maximise social welfare and ensuring people’s safety.
Disadvantage of free market approach
Without government intervention, there would be missing markets.
The free rider problem would mean most economic agents would rely on others to provide public goods like education, defence, and street lighting.
These goods would be under consumed and have positive externalities, and self-interest would prevent a free market alone to provide adequate public good provision.
This would inevitably affect the lowest income earners the most and increase inequality.
It’s the poorest that have the most income elastic demand and so are important for the success of a free market.
