1.4 topic sheets Flashcards
Give three reasons why governments must intervene in markets?
- To correct market failure.
- To discourage demerit goods
- To provide public goods
- To correct information gaps
- To reduce negative externalities
How can government intervention lead to an increase in economic welfare?
By correcting market failure, for example by taxing a good with negative externalities and this encourages the market to provide the socially optimum quantity of the good, rather than over producing.
Name the 4 methods that the government uses to intervene in markets?
1-Price controls
2-Government legislation and regulation
3-Direct provision
4- Financial intervention/taxes or subsidies.
Name 3 methods of price control?
-Maximum prices (To encourage consumption)
-Minimum prices (to discourage consumption)
Buffer stocks (to minimise price fluctuations in volatile commodity markets)
Explain how max prices work? What is an example of this?
What is the impact?
A max price is a way of keeping a good or service affordable and not letting it more expensive than a certain point.
This acts as a price ceiling.
New York rent controls in new york.
It will cause excess demand.
Explain how minimum prices work
A minimum price encourages producers to produce more, or discourage consumption.
This acts as a price floor below which prices cannot fall, only effective if set above equilibrium price.
Explain how minimum prices work?
A minimum price encourages producers to produce more, or discourage consumption.
This acts as a price floor below which prices cannot fall, only effective if set above equilibrium price.
Explain how minimum prices work?
What is an example of this?
What is the impact of this?
A minimum price encourages producers to produce more, or discourage consumption.
This acts as a price floor below which prices cannot fall, only effective if set above equilibrium price.
National minimum wage is an example of this as labour cannot be paid for under this price.
It causes excess supply.
Explain how buffer stock systems work?
Why are they needed?
Prices in the farming market are volatile, and farmer’s/primary producer’s income is unpredictable. This causes problems in the economy as GDP fluctuates dramatically and there are times when primary producers have to shut down.
This makes it unlikely that primary producers will invest.
The government introduces a buffer stock scheme whereby a price ceiling and a price floor are added which reduces volatility, which guarantees profit which facilitates investment.
What are the adv and dis of buffer stock schemes?
ADV- keeps incomes stable.
Keeps output and employment stable.
Encourages investmemt
can be profit making for firms if they sell high.
DIS- The price floor is set too high which means the government are buying up the stock more and rarely have to sell it.
This means the cost of continuing to buy is too expensive, creating unacceptable opportunity costs.
The government are unable to control the world price unless several economies co-operate.
The cost of storing some products is high, and some products can perish.
Most schemes break down in the long run.
Give 4 examples of government regulation/legislation
- Restrictions on where the product can be sold.
- Restrictions on advertising
3- Total bans
4-Age restrictions
5- Regulations on packaging
6- exemption from consuming the product in specific places.
Give 2 reasons for the direct provision of goods from government?
If the good is a public good or “quasi public good” which means they are not provided for “missing market”.
If the good is a human right, for example health or education.
What could be the appropriate intervention for a merit good?
1-Subsidy
2- maximum price
3- Direct provision of the good.
4- Regulations to make consumption compulsory. Eg catalytic converter.
What could be appropriate intervention for a demerit good?
1-Indirect Taxes
2- Minimum price
3- Regulations and legislation (Age restriction)
4- Complete and total ban.
What could be appropriate intervention for a demerit good?
1-Indirect Taxes
2- Minimum price
3- Regulations and legislation (Age restriction)
4- Complete and total ban.
