1.4.1 - Government intervention in markets Flashcards
(24 cards)
What is the role of the government in the free market?
Government take the view that the markets are best suited to allocating scarce resources and allow market forces of supply and demand to set prices. Main role of the government to protect property rights, uphold law and maintain currency value.
What is Government intervention?
Government intervention is when the state gets involved in markets and takes action to try to correct market failure, improve economic efficiency, impact upon the macroeconomic performance of the economy and change distribution of income in wealth. Government can use many different methods to do this.
What are some examples of Government intervention?
Factor immobility which leads to structural unemployment the state can invest in education and training to prevent this.
Public goods which the free market fails to provide pure public goods leading to free rider problem, Government fund public goods for collective consumption
Negative externalities and demerit goods which are over consumed as they are bad for society. Government fund information campaigns minimum age for consumption and indirect taxes.
What are some examples of fiscal policy intervention?
Indirect taxes: can be used to raise the price of products with negative externalities designed to increase oppotunity cost of consumption shift market equilibrium towards socially optimum level supply falls.
Subsidies: To consumers lower the prices of goods with positive externalities. Boost consumption and output of products subsidies cause an increase in market supply.
Tax relief: Government offer financial assistance such as tax credits for business investment in research and development reduction in corporation tax to promote capital investment and greater employment
Changes in taxation and welfare payments: Used to influence to overall distribution of income and wealth higher direct taxes increase welfare benefits to make system more progressive.
What are the evaluations of government intervention?
Effects of intervention cannot be forecasted with great accuracy peoples behaviour may change.
One single intervention is unlikely to produce a solution to deep-rooted economic and social problems.
Intervention is not always necessary market forces can be powerful in finding profitable solutions to problems. Like innovation and invention.
There are costs and benefits to government intervention which may have a time lag
Government intervention does not always work in the way it was intended or as economic theory predicts it should. ‘Law of unintended consequences’
How can the effects of intervention be judged?
Efficiency of a policy how does it effect resources.
Effectiveness of a policy which policies are suited to different economic situations.
Equity effects of intervention is a policy fair or does one group in society gain more than another
Sustainability of a policy does the policy reduce the ability of future generations to engage in future economic activity
What is taxation and how is it a form of government intervention?
Government assesses the cost to society of a negative externality and then sets a tax rate on those externalities that equals the value of the externality. This increase cost to customers and shifts the supply curve left. The results in a fall in demand and output thus fewer externalities are created.
What are the benefits of taxations as a form of Government intervention?
Indirect taxes can target particular industries (externalities) and therefore make the polluter pay.
Tax can be used as an incentive to reduce the externality. Look for a more efficient ways of doing something.
Indirect taxes are based on the principle that the polluters pay.
Tax funs raised by the government can be used to clean up the environment or compensate the victims.
The level of pollution/ size of the externality should fall as output of the good or service is reduced and the price increased.
What are the drawbacks of using taxation as a form of Government intervention?
It is very difficult for the government to fix a monetary value on an externality and therefore its hard to decide what the optimal level of tax should be.
Not all costs can be split this way.
Indirect taxes increase the cost of production for firms making them less competitive compared to firms in other countries where these taxes are not applied.
The demand for the good or service may be price inelastic so the overall reduction in pollution levels may be small.
Tax revenue raised may not be used to compensate victims or clean up environment.
Encourage illegal markets.
What are subsidies and how are they a form of government intervention?
Subsidies can be used in terms of correcting market failure of positive consumption externalities. Subsidies increase supply by lowering Marginal social cost so socially optimum point is achieved.
What are the benefits of using subsidies as a form of government intervention?
Reduces prices and increase quantity.
Leads to an increase in production/consumption or merit goods.
Encourages firms to take part in activities that are beneficial.
In the long term subsidies for a good change preference. They encourage firms to develop more products with positive externalities.
What are the drawbacks of using subsidies as a form of government intervention?
The money to pay for the subsidy will have to be met through taxation.
All subsidies have an oppotunity cost.
It is difficult to estimate the extent to which the positive externality therefore hard to work out how much subsidy to give.
The Government may have poor information about the product/service and therefore don’t know how much to subsidise.
There is a danger that the Government subsidies encourages firms to be inefficient and they come to rely on the subsidy rather than improve their efficiency.
What are maximum prices and how are they a form of Government intervention?
Max price is set to increase consumption of a merit good or to make necessities more affordable.
Government may set a maximum price rent to keep cost of renting affordable.
If a market price is set above the market equilibrium it will have no impact.
if it is set below to market equilibrium it will lead to excess demand and shortage in supply.
What are the benefits of using maximum price levels as a form of Government intervention?
Leads to lower prices for consumers.
Max prices can help to increase fairness, by allowing more people to purchase certain goods and services.
Max prices can be used to prevent monopolies from exploiting customers and suppliers with higher prices.
Usually reserved for important goods such as food and rent.
What are the drawbacks of using maximum prices as a form of Government intervention?
Leads to a shortage in supply.
Since demand is higher than supply some people who want to buy the good aren’t able to.
Can lead to black markets emerging.
Government may need to introduce a rationing scheme to allocate the good.
Excess demand can lead to the creation of a black market for the good
What are minimum prices and how are they a form of Government intervention?
A minimum price is a price floor to make sure suppliers get a fair price.
A minimum price set below the market equilibrium will have no impact however, above market equilibrium reduces demand and increases supply leading to excess supply.
Government may have to buy excess supply at a guaranteed price.
What are the benefits of using minimum prices as a form of government intervention?
Designed to give producers more income.
Protect businesses and industry (in theory).
Protects consumers from over buying demerit goods.
What are the drawbacks of using minimum prices as a form of government intervention?
Higher prices for consumers.
Market is in disequilibrium.
Higher tariff necessary on imports to keep prices high.
What to do with the over supply of the products what occurs with it.
What are tradeable pollution permits and how are they a form of Government intervention?
Government permit a certain amount of something with the aim of reducing it overall.
Issues permits to pollute the total of which equals the total amount wants to see polluted.
Government allocated these resources to individuals firms.
The permits are then tradeable for money between the different polluters.
Firms that succeed in reducing their pollution can sell their spare permits onto other producers exceeding their limits.
What are the benefits of using pollution permits as a form of Government intervention?
Schemes are good way to reduce pollution as they encourage firms to be more efficient and pollute less.
Using permits tends to cost industries less than regulations
A market is created for buying and selling the permits. Businesses that don’t use their permits can sell them on
This creates a strong incentive to reduce the pollution.
Number of permits can be reduced overtime to ensure that pollution targets are left.
Government can sell additional permits and compensate victims.
What are the drawbacks of using pollution permits as a form of Government intervention?
Deciding upon the right number of permits to allocate is difficult.
Government might allocate too few permits. Firms production costs rapidly rise due to the additional permits and fines they face reducing international competitiveness.
Disputes have arisen over the allocation of permits.
Some firms have taken legal action against the government and the EU if they feel they should receive a bigger allowance.
Firms might pass on the cost of buying the pollution permits onto the customer. higher prices
What is regulation legislation and how is it a form of Government intervention?
Regulation are rules enforced by an authority (government). They are normally backup laws
Legislation means legal action can be taken against those who break the rules.
What are the benefits of using regulation and legislation as a form of Government intervention?
Legally binding. Businesses must adjust their behaviour or risk prosecution.
Can reduce demerit goods and services limit sale of these goods.
Can reduce the power of monopolies setting up regulatory bodies.
Can provide protection for consumers and producers arising from asymmetric information. Sales of goods act.
Can have a relatively quick impact
Easy to understand and cheap to implement
Revenue from the fines can be used to correct the cause of market failure or compensate those affected
What are the drawbacks of using regulation and legislation as a form of Government intervention?
Difficult to fix the right level of legislation.
Regulation may be too tight or too lax.
Regulation needs monitoring and enforcing extra costs.
It is likely to increase the costs of production and therefore reduce the businesses profits.
Businesses may simply increase prices to cover the cost of new regulation.
Ideally the correct level would be where the economic benefit arising from the reduction in externality would be equal to the economic cost imposed by the regulation.
Firms competitive disadvantage overseas.
