14. Government Intervention Flashcards
(37 cards)
Main Form of Government Intervention
S - Subsidies
T - Taxation
R - Regulation
I - Information provision
P - Public/private partnerships
P - Price controls
P - Pollution permits (Tradable)
E - Expenditure (Government)
B - Buffer stock systems
C - Competition policy
Taxation
Tax is an amount paid to the government. Tax can be either direct or indirect.
Subsidy
Amount paid to a business to produce products.
Price control
A minimum or a maximum price for which a product must be sold.
Buffer stock system
System of holding and releasing stock to manage a market price despite supply fluctuations.
Public/private partnership
Joint initiative between government and a producer(s) in order to increase supply to a market
Legislation
In relation to the economy, laws that a government puts in place to govern the production and consumption of products.
Regulation
Rules that are specific to an industry or market and that govern the production or consumption of a product within that industry/market.
Tradable pollution permits
System that forces producers to include the costs of pollution in their production decisions.
Information provision
Act of informing the public about the true nature of a product or market.
Competition policy
Legislation and regulation that aims to make a market more competitive.
Taxation addressed market failures:
●Negative externalities: Taxes internalize the societal costs of harmful goods, reducing their consumption (e.g., cigarettes, alcohol).
●Demerit goods: Discourages overuse by increasing prices.
Subsidies addressed market failures:
●Underproduction of merit goods: Ensures socially beneficial goods are produced and consumed more.
●Positive externalities: Internalizes societal benefits.
Price control addressed market failures:
●Negative externalities: Minimum prices discourage harmful consumption (e.g., alcohol).
●Inequity: Maximum prices improve access to essential goods for low-income groups (e.g., affordable housing).
Buffer stock system addressed market failures:
●Price volatility: Reduces harmful effects of fluctuating prices which impact household budgets.
●Market instability: Ensures consistent supply regardless of production conditions (e.g., weather variations).
Public/private partnership addressed market failures:
●Expands supply of essential services.
●Reduces government spending on areas that can be privatized.
●Lowers equilibrium prices and increases availability.
Legislation and regulation addressed market failures:
●Negative externalities: Reduces drug use or pollution
●Demerit goods: Limits overconsumption of harmful products like alcohol.
●Public safety: Improves standards for industries such as transportation.
Trade pollution permits addressed market failures:
●Negative externalities: Internalizes the social costs of pollution by making firms pay for their environmental impact.
●Inefficient resource allocation: Encourages firms to adopt cleaner production methods.
Competition policy addressed market failures:
●Abuse of monopoly power: Prevents large firms from exploiting their dominance to the detriment of consumers and smaller competitors.
●Collusive behavior: Discourages firms from artificially inflating prices to earn supernormal profits.
Information provision addressed market failures:
●Overconsumption of demerit goods: Reduces consumption of harmful products (e.g., cigarettes).
●Underconsumption of merit goods: Promotes greater uptake of beneficial products (e.g., vaccinations).
Example of Taxation
●Cigarette taxes: Reduce smoking rates by raising prices to counteract addiction.
●Carbon taxes: Discourage pollution by taxing emissions.
Example of subsidies
●Agriculture: Subsidies for staple foods.
●Renewable Energy: Solar and wind power incentives.
●Education: Grants for schools and students
Example of Price Control
●Minimum price for alcohol in Scotland to reduce harmful drinking and healthcare costs.
●Rent control in Manhattan to make housing affordable in a high-cost area.
Example of Buffer Stock System
●Rice reserves in many developing countries to ensure food security during poor harvests.
●EU Common Agricultural Policy: Includes buffer stock mechanisms to stabilize agricultural markets.
