1.4 Government Intervention/Failure Flashcards
(13 cards)
Government Intervention
When a government gets involved in markets and takes action to correct market failures.
What are indirect taxes used for?
To increase PL and opportunity cost of demerit goods.
Maximum Prices
A legally imposed price ceiling which prices cannot exceed.
Minimum Price
A legally imposed price floor which prices can’t fall under.
What are trade pollution permits?
Where the government gives firms permits, allowing them to produce a set amount of Carbon emissions per year.
How does the Gov regulate markets to correct externalities?
- Indirect taxes
- Subsidies
- Max/Min price
- Regulation
Government Failure
When governments intervention leads to a less efficient allocation of resources, therefore worsening the situation, leading to a net welfare loss.
What are the causes of government failure?
- Distortion of price signals (When PL doesn’t reflect S & D conditions)
- Unintended consequences
- Excessive administration costs
- Information gaps
The law of unintended consequences?
The unintended effects due to actions of consumers, producers or governments.
What is meant by distortion of price signals?
When prices in a market don’t reflect the true supply/demand conditions, resulting in overproduction / underproduction of goods and a misallocation of resources.
What is meant by excess administrative costs?
When the implementation of a policy costs more than anticipated, the gov may not feel it’s worth implementing.
What are some examples of government intervention?
- Regulation
- Max/min price
- Indirect taxes
- Subsidies
- Tradeable pollution permits
- Provision of public goods
Explain government failure as intervention that results in a net welfare loss.
- Gov intervention may create new problems or exacerbate existing problems.
- Therefore society becomes worse off, leading to a net welfare loss
