government intervention

Question 1

government intervention meaning

Answer 1

when the government attempts to correct market failure

Question 2

types of gov intervention

Answer 2

indirect tax
subsidies
minimum and maximum price

Question 3

indirect tax in gov intervention

Answer 3

reduce negative externalities
tax causes decrease in supply
increase in price
decrease in demand

Question 4

pro of indirect tax

Answer 4

precise target e.g. tobacco
product is still available
gov rev increases

Question 5

con of indirect tax

Answer 5

encourage informal economy e.g. cheap import
unintended consequences
regressive
PED of demerit good inelastic so doesn’t change demand
increase cost of production
difficult to put monetary value on externalities
use tax rev to pay off debt and not close negative externality
imperfect information when setting tax

Question 6

subsidies pro

Answer 6

precise
cheaper cost of production
social optimum reached so welfare is maximised
have other positive impacts e.g. increase competition so increase innovation

Question 7

con of subsidies

Answer 7

firms become inefficient and rely on them
opportunity cost
once introduced difficult to remove
exact size of the externality is not known

Question 8

maximum price meaning

Answer 8

legally imposed price celling for a good or service
set bellow the equilibrium

Question 9

minimum price meaning

Answer 9

legally imposed price floor for goods and services
set above the equilibrium

Question 10

pro of minimum and max price

Answer 10

set where MSB=MSC
increase social welfare
prevent monopolies from exploiting the consumer

Question 11

con of minimum and maximum price

Answer 11

distortion of price signals - excess supply and demand
difficult to know where to exactly set it as its difficult to know the value of the externality
increase in informal economy

Question 12

trade pollution permit meaning

Answer 12

permit to allow a fixed amount of pollution to be created

Question 13

pro of a pollution permit

Answer 13

gov can cap number of permits- pollution will fall to target- increase social welfare- number of permits can be reduced in the future
gov rev through selling permits and fines
encourages green technology
low cost to implement
encourages sharing info about green tech and research (joint ventures)

Question 14

con of pollution permits

Answer 14

expensive to monitor
hard to know how may to give
gov needs to give large enough fines
increase cost of production
future benefits
not aware of externalities
which businesses to include
pollution is a world wide problem

Question 15

carbon tax meaning

Answer 15

levy on the consumption or production of goods and services which cause CO2 emissions

Question 16

pro of carbon tax

Answer 16

makes polluter pay
predictable for businesses
tax rev

Question 17

con of carbon tax

Answer 17

may be PED inelastic so tax has little effect
structural unemployment in carbon related firms
regressive

Question 18

provision of public goods pro

Answer 18

corrects market failure by providing goods which wouldn’t be provided - improves social welfare
equality as anyone can access them
the goods will benefit individuals and society

Question 19

provision of public goods con

Answer 19

expensive and opportunity cost
gov could produce incorrect goods
inefficient as there is no need to cut costs
corruption and conflicting objectives

Question 20

provision of information pro

Answer 20

consumers can act rationally
best when used alongside other policies

Question 21

provision of information con

Answer 21

expensive for the gov to do - opp cost
gov may not have all info
consumers may not listen

Question 22

regulation pro

Answer 22

simple to understand
gov rev
consumer protection

Question 23

con of regulation

Answer 23

difficult to set at correct level
increase in cost of production
some firms will ignore it
forcing people to buy merit goods may be regressive and decreases consumer soverenty
unintended consequences
expensive to impose

Question 24

government failure meaning

Answer 24

when the government attempts to correct market failure but it leads to an increased net welfare loss