1.4.1 - Government Intervention In Markets Flashcards
(20 cards)
What Are The Reasons For Government Intervention In Markets?
(5 Points)
~ Support households.
~ Correct market failure.
~ Support firms.
~ Promote equity.
~ Collect government revenue.
Describe The Use Of INDIRECT TAX, In Solving Market Failure, Such As NEGATIVE EXTERNALITIES IN PRODUCTION
(7 Points)
Diagram Steps:
~ MPC curve shifts left to form, MSC = MPC + Tax.
~ New equilibrium is at Q*
Theory:
~ Increases firms costs of production, raising price and decreasing quantities.
~ Internalises the externalities, polluter pays for the externalities they are generating.
~ Solves over consumption and production.
~ At Q*, meaning that AE is promoted.
~ Generates government revenue, to further solve market failure.
Describe The Use Of INDIRECT TAX, In Solving Market Failure Such As NEGATIVE EXTERNALITIES IN CONSUMPTION
(7 Points)
Diagram Steps:
~ MPC curve shifts left to form, MPC + Tax.
~ New equilibrium is at Q*.
Theory:
~ Increases firms costs of production, raising price and decreasing quantities.
~ Internalises the externalities, polluter pays for the externalities they are generating.
~ Solves over consumption and production.
~ At Q*, meaning that AE is promoted.
~ Generates government revenue, to further solve market failure.
What Are Issues With Using INDIRECT TAX To Solve Market Failures?
(4 Points)
~ There may be inelastic PED.
~ Governments do not have perfect information, to place tax at the right level.
~ Overtaxation, can lead to black markets forming.
~ Can have a regressive effect.
Describe The Use Of SUBSIDIES, In Solving Market Failure, Such As POSITIVE EXTERNALITIES IN CONSUMPTION
(5 Points)
Diagram Steps:
~ MPC curve shifts to the right, to form MPC + Sub.
Theory:
~ Decreases costs of production, lowering the price and increasing quantity.
~ Solves under consumption or production issues.
~ At Q*, meaning AE is being promoted and welfare is being maximised.
~ There is a cost to the government.
Describe The Use Of SUBSIDIES, In Solving Market Failure, Such As POSITIVE EXTERNALITIES IN PRODUCTION
(5 Points)
Diagram Steps:
~ MPC curve shifts right, to form MSC = MPC + Sub.
Theory:
~ Decreases costs of production, decreasing price and increasing quantity.
~ Solves under consumption or production issues.
~ At Q*, meaning AE is being promoted and welfare is being maximised.
~ There is a cost to the government.
What Are Issues With Using SUBSIDIES To Solve Market Failures?
(4 Points)
~ Costly for the government, generating an opportunity cost.
~ Governments do not have perfect information, to place subsidy at the right level.
~ Firms may not use it, in the way that is intended.
~ There might be inelastic PED.
What Is Regulation?
(2 Points)
~ Rule / Law enacted by the government that must be followed by economic agents, to encourage a change in behaviour.
~ Can solve over production and consumption and under production and consumption market failures.
What Are The Laws, Regulation Can Make?
(6 Points)
~ Bans.
~ Limits.
~ Caps. E.g. Pollution caps.
~ Enforcement.
~ Punishment. E.g. Fines.
~ Compulsory. E.g. Graphic imagery on cigarettes.
What The Issues When Using REGULATION To Solve Market
Failures?
(4 Points)
~ Costly, administrating and enforcement costs.
~ Unintended consequences, such as black markets forming.
~ Firms can try and cheat the regulation.
~ Regulatory capture.
What Are Tradable Pollution Permits?
(6 Points)
~ Cap is set at Q*.
~ Government issues permits, to match the price cap, creating a market for permits.
~ Firms make a decision, based on the least cost -> Invest in green energy or buy spare permits.
~ Leading to the externality being internalised, as they are paying for their pollution costs.
~ With strict enforcement pollution goes down to the social optimum, AE will be maximised.
~ Policy promotes LR incentives to invest into green energy, as overtime the gov reduce the number of permits.
What The Issues When Using TRADABLE POLLUTION PERMITS To Solve Market Failures?
(3 Points)
~ Costs of enforcement.
~ Imperfect information for governments, leading to unintended consequences.
~ Higher costs of production, means higher costs for consumers.
What Is State Provision Of Public Goods?
(2 Points)
~ Leads to the free-rider problem, as they are under-provided by the free market.
~ Government provides them, through taxation.
What The Issues When Using STATE PROVISION OF PUBLIC GOODS To Solve Market Failures?
(3 Points)
~ Costly, represents an opportunity cost.
~ Imperfect information, quantity may not be at the right point.
~ State run organisations are usually inefficient, as they lack a profit motive.
Describe Minimum Price To Solve Market Failures
(4 Points)
~ Discourages consumption of demerit goods.
~ Over production and consumption at Q1.
~ Minimum price imposed, demand contracts as consumption is discouraged.
~ QD falls from Q1 -> Q*.
What The Issues When Using MINIMUM PRICES To Solve Market Failures?
(4 Points)
~ Might be inelastic PED.
~ Regressive effect.
~ Can cause black market formations.
~ Unintended consequences.
Describe Maximum Prices To Solve Market Failures
(2 Points)
~ Promotes consumption of essential products.
~ Prices are lower, causing an extension in demand.
What The Issues When Using MAXIMUM PRICES To Solve Market Failures?
(4 Points)
~ Creates shortages (Excess demand), not everyone is able to purchase the product.
~ Can cause black market formations.
~ Enforcement costs.
~ Might not be set at the right level.
Describe Information Provision To Solve Market Failures
(2 Points)
~ Government funded information provision to encourage (Merit goods) or discourage (De-merit goods) consumption.
~ Helps consumers make rational decisions, increasing the MPB.
What The Issues When Using INFORMATION PROVISION To Solve Market Failures?
(3 Points)
~ Expensive.
~ No guarantee of success.
~ Takes a long time for consumers to take in the information.
