Government Intervention In The Market

Question 1

What is the definition of economic welfare?

Allocative efficiency?

Answer 1

=the standard of living of an individual or group

=occurs when it is impossible to improve overall economic welfare by reallocating resources between industries or markets

Question 2

What is a missing market?

Answer 2

Occurs when the incentive function of prices completely breaks down and a market fails to come into existence or disappears.

Question 3

Describe the price mechanism.

Answer 3

• Signalling= prices provide info to traders
• Incentive= info signalled by relative prices incentivises people to alter their economic behaviour
• Rationing= change in economic behaviour causes goods/services to be rationed to consumers as prices or demand increase

Question 4

How might the Gov policy negative externalities?

Answer 4

•Regulation/quality control
E.g max emission limits 
•Taxation (internalises externality)
E.g pollution tax
•Permits 
E.g traded pollution permits
•Trading property rights 
E.g Coase Theorem

Question 5

What are Gov policies to encourage positive externalities?

Answer 5

•Regulation
E.g Local authorities requiring maintaining of houses
•Subsidies
E.g public transport production or travel for consumers

Question 6

What is a demerit good?

What is a merit good?

Answer 6

=a good, such as tobacco, for which the social costs of consumption exceed the private
Over consumed in the free market

=a good, such a healthcare, for which the social benefits of consumption exceed the private
Under consumed in the free market

Question 7

What are policies the Gov use to encourage/discourage merit or de merit goods?

Answer 7

Merit= regulation, subsidies, MAX price

De merit= regulation, taxation, MIN price

Question 8

What is Gov failure?

Answer 8

Occurs when government intervention in the economy is ineffective, wasteful or damaging

Question 9

What is cost-benefit analysis?

Answer 9

A technique for assessing all the costs and benefits likely to result from an economic decision.
The social costs and benefits rather than just the private.

Question 10

What are some implications with CBA?

Answer 10

• Forecasting= difficult to forecast all costs and benefits e.g development of new technologies
• Objectives= helps to choose between different ways of achieving an objective but not alternative objectives
• Social Welfare= uses 60 year old Hicks-Kaldor test which assumes compensation to “losers” which is inaccurate

Question 11

What is market failure?

Answer 11

Occurs when a market functions badly, unsatisfactory or not at all.

Question 12

What are Gov policies aimed to reduce poverty+income inequalities?

Answer 12

•Progressive Taxation: rich pay a higher proportion of income tax than the poor
•Transfers to the poor: income paid by state to benefits recipients+funded by tax
E.g unemployment benefits
•Tax credits: Gov pay those on lower incomes

Question 13

What is horizontal equity?

What is vertical equity?

Answer 13

H= describes households paying similar taxes+receiving similar benefits

V= redistributes income from rich to poor on the basis of need

Question 14

What is competition policy?

Answer 14

=aims to make goods markets more competitive, compromises policy toward monopoly, mergers+restrictive trading prices

Question 15

What are the 3 parts to competition policy?

Answer 15

•Monopoly= Competition and Markets Authority (CMA) uses structure, conduct + performance to measure public interest

•Merger= CBA measures mergers+takeovers by whether they lead to a substantial lessening of competition
European Commission for those in EU

•Restrictive trading practice policy= an activity undertaken by a firm on its own or in collusion with other firms that restricts competition
CMA

Question 16

What is a cartel?

What is a fully integrated monopoly?

Answer 16

=a price ring formed when independent firms make a collective restrictive trading agreement to charge the same price+possibly reduce output

=a dynamic firm grows+benefits from economies of scale, becoming a monopoly as a reward for successful competition

Question 17

What is a statutory monopoly?

Answer 17

When one firm has over 25% of the market for the supply or acquisition of a particular good or service. (Scale monopoly)

When a number of firms together have a 25% share+restrict competition. (Complex)

Question 18

What are the 7 alternative approaches to monopolies?

Answer 18

• compulsory breaking up
• use of price controls
• taxing profits
• rates of return regulation (min or max)
• public ownership (nationalisation)
• privatising (privatisation)
• deregulation+removal of barriers to entry

Question 19

What is nationalisation?

What is privatisation?

Answer 19

=owned by the state

=transfer of publicly owned assets to private sector

Question 20

What are the pros of privatisation?

Answer 20

✔️Gov revenue raising as reduced spending 
✔️promotion of competition
✔️promotion of efficiency 
✔️capitalism (public owning shares)
✔️reduces trade union power 
✔️increased investment

Question 21

What are the cons of privatisation?

Answer 21

✖️monopoly abuse
✖️short-termism rather than long-termism
✖️reduction in investment
✖️unemployment if private firms want to cut costs

Question 22

What are public private partnerships? (PPPs)

Answer 22

Partnerships between private and public sectors to provide public services.

E.g the London Underground
•public= London Underground Limited (LUL)
•private= PriceWaterhouse Coopers (PWC)

Question 23

What is regulatory capture?

Answer 23

Theory that regulatory agencies eventually come to be dominated by the very industries they were charged with regulating

Question 24

What is deregulation and what are the methods involved?

Answer 24

=opening up markets and encouraging the entry of new suppliers

1) promotion of competition+market contestability through removal of barriers to entry
2) removal of red tape and bureaucracy which imposes unnecessary costs
3) boosting market supply
4) breaking down prices for consumers
5) encouraging investment+productivity

Question 25

What is a price taker?

What is a price maker?

Answer 25

=an individual or company that is not influential enough to affect the price of a good

=a monopolistic company that can dictate the prices it sets due to a lack of substitutes

Question 26

What is a public good?

Answer 26

• non-excludable= any consumer can access the good without having to pay a financial cost
• non-rivalry= multiple consumers can simultaneously consume the good
• non-rejectable= consumers cannot disallow the good, e.g flood defence

Market failure= private sector cannot afford to provide it, hard to measure social benefits (G)

Question 27

What is the tragedy of the commons?

Answer 27

• every individual tries to reap the greatest benefit from a given resource
• demand exceeds supply, every individual who consumes an additional unit directly harms others who can no longer enjoy the benefits