14 Government intervention

Question 1

Direct taxation

Answer 1

Amount levied on a business or an individual that must be paid to the government e.g government tax

Question 2

indirect taxation

Answer 2

Amount levied on a producer to increase the cost of a product e.g VAT

Question 3

effectiveness of tax

Answer 3

• PED - inelastic are likely to see high price increases for the consumer but little change in quantity
• XED - if product can be easily substituted for one without the same level of taxation

Question 4

subsidies

Answer 4

amount paid on a business to produce products - increase the supply - decreasing price and increasing quantity

Question 5

effectiveness of a subsidy

Answer 5

• PED - price elastic are likely to see a relatively small price change for the consumer leading to large change in quantity
• XED - if consumers can switch to the subsisdised product then a relatively small subsidy can lead to a large increase in quantity

Question 6

Government expenditure

Answer 6

• have direct effect on supply of a product i.e through a subsidy
• gov can spend where the effect might be more subtle increase employment in region - improve high street to encourage businesses

Question 7

price control

Answer 7

a minimum or maximum price for which a product must be sold

Question 8

price ceiling

Answer 8

• max price
• rent control new york mkinging rentals more affordable for lower incomes

Question 9

price floor

Answer 9

• min price
• alchol in sctoland reduce negative effects of excesssive alchol consumption as a demerit good and negative externality

Question 10

buffer stock system

Answer 10

syste of holding and releasing tsock to maintain a market price despite supply fluctuations
- bad supply - price will increase and if a necessity would cause hardship for households so then stock can be released from the buffer stock therefore increasing supply
- increased supply would decrease prices for producers so stock can be placed in storage to decrease supply

Question 11

effectiveness of buffer stock

Answer 11

• product must be able to be stored in some format
• cost of storage may be added leading to inefficiency
• price ceiling and floor my be set incorrectly my led to excess supply or demand every year

Question 12

public/private partnership

Answer 12

joint initiative between government and producer in order to supply to a market

Question 13

legislation

Answer 13

laws that a government puts in place to govern the production and consumption of products
- reduce negative externality and demerit goods
- eliminate market for product so no legitimate supply and demand
- restrict supply (license) or restrict demand (n age limit on drinking)

Question 14

effectiveness of legislation

Answer 14

• punishment for breaking law - must be seen as an effective deterrent
• chance of being caught
• costs of enforcement - limited funds available to enforce a range f laws - cost of enforcing pollution control may be too high

Question 15

regulation

Answer 15

• rules that are specific to industry or market ad that govern the production or consumption of a product within market/industry

Question 16

Tradable pollution permits

Answer 16

• system that forces producers to include the costs of pollution in their production decisions
• pushing cost of pollution back onto producers
• increases their cost of production
• firm invests i cleaner technology then they can sell permit decreasing their cost of production a reward for green tech

Question 17

effectiveness of tradable pollution permits

Answer 17

• price of permits - too low negative externality continues or worsens
• pollution will continue - rewards firms for cleaner production but many firms absorb cost and continue to pollute
• competitiveness of market - large firms buy all permits forcing smaller businesses out of market

Question 18

Information provision

Answer 18

• act of informing the public about the true nature of a product or market
• try and educate consumers tp therefore decrease or increase consumption
• ex smoking cigarettes

Question 19

Competition policy

Answer 19

• legislation or regulation that aims to make a market more competitive
• large firms have market power and set higher prices

Question 20

collusive behaviour

Answer 20

when a number of firms agree to set a high price in order to gain supernormal profit

Question 21

Abuse of market power

Answer 21

large dominant firm uses its power to an unfair advantage in the market

Question 22

Government failure

Answer 22

when government intervention does not reduce market failure and may even increase it or introduce a new failure. in the market

Question 23

cause of government failure (estimating the extent of the market failure)

Answer 23

government intervention requires the government to estimate the size of the market failure. i.e level of taxation

Question 24

cause of government failure (cost of intervention)

Answer 24

government intervention has to be administered. New taxes must be levied failing and equitably. Information provision requires a format to be created and distributed

Question 25

cause of government failure (political agendas)

Answer 25

some intervention is motivated by political benefit rather than reducing market failure

Question 26

cause of government failure (lack of a profit incentive)

Answer 26

NHS lacks incentive to reduce costs because there is no profit motive

Question 27

cause of government failure (regulatory capture)

Answer 27

firms operating in the market know most about market failure. when a government agency operates in favour of producers rather than consumers strengthening market failure

Question 28

cause of government failure (moral hazard)

Answer 28

firms that are aware the government is milling to protect market will make riskier decisions e.g banks will be bailed out

Question 29

consequences of government failure

Answer 29

• costs leading to opportunity cost of not being able to pay for other government projects
• intervention may ea to exciting frms leading to unemployment or loss of industry
• disincentivizes films from increasing production to the most efficient points