1.4 Government Intervention Flashcards
(29 cards)
What are the 6 government interventions in markets?
1)Indirect tax
2)Subsidies
3)Maximum and minimum prices
4)Pollution permits
5)Provision of public goods
6)Provision of information
How does indirect taxation prevent market failure?
Taxes cause a fall in supply and increase the costs to the individual, so MPC will shift left from S1 to S2.
What are the advantages of indirect taxation?
-it internalises the externality: the market now produces at the social equilibrium position and social welfare is maximised.
-it raises government revenue: could be used to solve the externality in other ways such as education.
What are the disadvantages of indirect taxation?
-difficult to target the tax: difficult to know the size of the externality.
-if demand for the good is inelastic then the tax will be ineffective at reducing output.
How do subsidies prevent market failure?
Shift the supply curve (MPC) right as it will lower costs of production from S1 to S2.
What are the advantages of subsidies?
-society reaches the social optimum and welfare is maximised.
-encourage small businesses, bringing equality and encouraging exports.
What are the disadvantages of subsidies?
-The subsidies opportunity cost.
-Subsidies can cause producers to become inefficient (reliant)
How do maximum and minimum prices prevent market failure?
-Max prices are set on goods with positive externalities to stop monopolies exploiting customers.
-Min prices are set on goods with negative externalities so that the price is raised to the social optimum and consumption is discouraged and production is encouraged.
What are the advantages with minimum and maximum prices?
-a maximum price ensures goods are affordable and a minimum price ensures producers get a fair price. These both reduce poverty and increase equality.
What is a buffer stock scheme?
Where both maximum and minimum prices are implemented at the same time.
What is a tradeable pollution permit?
A pollution permit allows the owner to pollute up to a specific amount of pollution and the government controls how many permits there are so limits the maximum amount of pollution.
What are the advantages of pollution permits?
-It is guaranteed that pollution will fall to the targets set by the government as the cap it.
-The government can raise revenue by selling permits and fining firms.
-Encourages companies to invest in green technology.
What are the disadvantages of pollution permits?
-This can be expensive to monitor, impose fines large enough to ensure firms follow regulations.
-It will raise costs for businesses, and it is likely that these higher costs will be passed onto consumers.
-Difficult to know how many permits the government should allow
What is the state provision of public goods?
When the government provides these public goods directly through taxation due to the free rider problem stating they are under provided in a free market.
What are the advantages of the provision of public goods?
-This prevents market failure by providing important goods which would otherwise not be provided.
-Bring about equality, by ensuring everyone has access to basic goods.
-There will be benefit of the goods themselves.
What are the disadvantages of the provision of public goods?
-This is expensive and represents a high opportunity cost for the government.
-the government may produce the wrong combination of goods as consumers cannot indicate their preferences.
-the government may be inefficient at production.
-Government officials may suffer from corruption and conflicting objectives.
What is the provision of information?
When there is asymmetric information, the government provides information to allow people to make informed decisions.
What are the advantages of the provision of information?
-This helps consumers to act rationally, which allows the market to work properly.
-it is best if the government use it alongside other policies.
What are the disadvantages of the provision of information?
-This can be expensive for the government to do, incurring an opportunity cost.
-the government themselves may not have all the information, so it may be difficult to inform consumers.
-Consumers may not listen due to irrational behaviour.
What is regulation?
Governments impose laws and caps to ensure that levels are set where MSB=MSC or to ensure that companies provide full information on products.
What is the advantage of regulation?
This can ensure consideration of externalities, prevent exploitation of consumers and keep consumers fully informed.
What are the disadvantages of regulation?
-Laws may be expensive for the government to monitor, incurring an opportunity cost.
-Firms may pass the costs on to the consumers in the form of higher prices.
-excessive regulation may reduce competition in a market and efficiency, reducing innovation.
What is government failure?
Government failure is when government intervention in the market leads to net welfare loss and a misallocation of resources. The total social costs are greater than the social benefit.
What are the causes of government failure?
-Distortion of price signals
-Unintended consequences
-Excessive administration costs
-Information gaps
