Alternate forms of government intervention

Question 1

Regulation

Answer 1

Laws that prohibit certain behaviors and actions

Question 2

Advantages of regulation

Answer 2

1. Regulation is easy and simple to understand
- really useful to children so they don’t make any wrong decisions in the future and schools provide lessons
- written on packages very simply

2. Information provision
- information is provided directly to the consumers such as on packaging
- easy to understand and can make rational choices

3. Can ban stuff with regulation

4. Revenue
- government receives money from some regulations if people don’t follow them as they have to pay a fine

5. A fair way of dealing with problems
- have to abide by it
- banning is much more effective than tax as it affects everyone the same way no matter how much income you earn

Question 3

Disadvantages of regulation

Answer 3

1. Formation of shadow market
- bad for society and can create more negative externalities

2. Costly to enforce
- have to monitor firms and businesses to make sure they are following regulation

3. Timelag
- takes time for legislation laws to be passed through parliament and actually implemented
- takes time for people and firms to change their behaviours

4. No incentive to improve in the long term

5. Not directly increases revenue like tax

6. Government failure
- if the government bans are good it will lead to the formation of a shadow market which cannot be regulated making the allocation of resources worth and more negative externalities

Question 4

Tradable pollution permits

Answer 4

Giving firms the legal right to pollute a certain amount
- decided by the governent

Question 5

What happens if a firm needs more or less permits?

Answer 5

• permits can be bought and sold between producers

Question 6

The market for permits

Answer 6

• supply for permits are fixed as the government decides on a level of permits so it is perfectly inelastic
• if the government have perfect information they would set the number of permit that firms need to produce at Q star
• this makes firms explicitly take account of negative externalities produced by pollution

Question 7

Advantages of tradable pollution permits

Answer 7

1. Firms can emit a specific amount of pollution
- firms can’t pass on the permit to consumers
- in a boom, demand for permits increase so the price of permits would increase but supply stays the same
- increase in price means less firms buy permits so firms have a limited amount of pollution they can produce so less pollution

2. Polluters pay principal
- permits means firms hold accountability for the pollution they produce explicitly
- penalizing the firms that are the most unsustainable
- large firms are responsible for most of the pollution as they have a higher output produced
- fair scheme as the bigger the firm the more pollution they create and the more permits required so they pay more
- firms that don’t produce a lot of pollution don’t need to pay as much unlike tax which impacts firms in the same way

3. Less incentive to pollute
- government could reduce the supply of permits making the more scarce and so prices increases
- makes it more expensive to acquire permits and so firms are less incentivized to release pollution

4. Revenue for government
- if demand goes up but supply stays the same, prices increase so gov get more revenue
- if a firm produces more than they are allowed to have to pay a fine

5. Market-based solution

Question 8

Disadvantages of tradable pollution permits

Answer 8

1. Government doesn’t know the optimal level of pollution
- they may have too many permits or firms can easily afford the permit so they can easily pollute
- this means there is still market failure so overproduction of pollutions still occurs
- the gov may also set to few permits which means it is hard off or firms to afford the permits and so difficult to produce
- this could lead to the derived demand for labour to decrease, unemployment increases, leads to underproduction

2. Costly to produce and enforce
- have to keep monitoring firms output and pollutions level so they may need atmospheric detectors
- increases government spending and opportunity cost
- difficult keep monitoring firms output and pollution levels as firms can hide pollution by declaring they have a produced as much as they have

3. Depends on the PED of the permit
- firms may not care about having to pay if they are large as the permits account for a small cost so less effective
- when there is a boom, price of permits increases due to an increase of demand, won’t impact some firms as much

4. Hard to work out who to allocate permits to
- the bigger firms would get more of the permits as they can afford it and not many left for smaller firms and so can’t produce
- they may go out of business which leads to people losing their jobs or unemployment increases
- larger firms will continue to capture more market share and dominate the market

5. Political interference
- a tradable pollution permit only works if there is international cooporations
- however this will never happen as developing countries are industrializing and are moving into the secondary sector
- if only the UK has permits firms will leave the UK and go to other countries where they can produce higher levels of output

Question 9

The impact of a tradable pollution permit on market failure

Answer 9

• increases firms their cost of production so MPC shifts to the left
• also incentivizes firms to invest into renewable energy which reduces pollution means firm’s need less permits
• negative externalities decrease and positive externalities increase so MSC shifts to the right
• new curve in the middle and new socially optimum
• this is good as output is allowed to go up more than what socially optimum was before

Question 10

State provision

Answer 10

When the government is the main provider of a good or service which is free at the point of use
- such as education and health care

Question 11

Advantages of state provision

Answer 11

1. Greater accessibility
- everyone can afford it and there is effective demand
- there will be massive positive externalities due to healthcare and education
- everyone has complete purchasing power helps lower income households to afford schooling

2.Improves income inequality
- the bottom 20% of households benefit more as they gain more transferable skills and can work in the tertiary sector to earn more

3. Increase in free healthcare
- positive externalities as less people will get ill and miss work which improves productivity
- people have a quick recovery time and less time of school and less days off the labor force
- workers can be more productive and get higher wages

Question 12

Disadvantages of state provision

Answer 12

1. Inefficiency
- workers perform underproductively as they are not profit incentive in the public sector
- healthcare and education system of lower quality which affects productivity of the future
- lack of competition means they are less incentivized to work productively and so quality does not increase
- population is increasing and people are living longer but resources are scarce which means that waiting lists would have to be put in place which does not improve productivity capacity
- more people moving into private healthcare and education

2. Exploitation
- people making appointments when they don’t actually need it
- this waste resources as taking the place of someone who might actually need it
- could lead to a bigger dead weight loss as free education and healthcare can be taken for granted and lose its value

3. Expensive
- opportunity cost for the government if investing in healthcare and education

Question 13

Public-private sector partnerships

Answer 13

When the government involves the private sector in public sector projects

Question 14

Advantages of public-private partnerships

Answer 14

1. Government provides funds for big projects
- enables private firms to be able to take on large projects that they would not be able to take on themselves

2. Improved efficiency
- workers and firm are motivated by profits
- can also win future contracts so try improve efficiency
- incentivizes them to finish their project really quickly to show that they are productive and efficient which increases brand reputation

3. Faster completion time
- gov give the contract to the most efficient and specialized companies
- making less mistakes as they specialize in each task and so produce more output per hour so faster
- if finished earlier and ahead of schedule they might get a bonus from the government

4. Innovation and quality increases
- motivated by profits and so provide higher quality goods
- have a higher incentive to produce even high-quality goods to show that they are competent at what they do and can win future contracts to maximise profits further

5. Control by the government
- government have oversight over what the private firm is doing and provide management
- government can regulate as want to welfare maximization so can put in place health and safety regulation
- can make sure the firm meet their deadlines

Question 15

Disadvantages of public-private partnerships

Answer 15

1. Private sector pay little concern to health and safety
- they are profit maximizers and so try to reduce costs as much as possible and so may choose the least safe option which is cheaper

2. Disagreement
- joint venture between government and private firms
- government want to maximize in welfare about private firm wants to maximise in profits on a trade-off would occur as can’t maximize both at the same time
- gov want health and safety regulation but is expensive so firms may not agree

3. Project delays
- due to the disagreements and conflicts of interest there may be delays in regards to the service being completed as it reduces productivity
- have to spend time to find a compromise or resolution

4. Asymmetric information
- the private firm may have more information than the government which can be used to increase funding which increases government spending
- increases the opportunity cost

5. Expensive
- the asymmetric information it can lead to exploitation
- if cost of raw materials increase more funding needed
- may cost more to borrow if interest rates increase

Question 16

Information campaigns

Answer 16

Providing information to the public sector so that consumers make informed decisions

Question 17

Advantages of information campaigns

Answer 17

1. Reduces myopia
- reduces short term thinking and start thinking and assessing the consequences more in the long term
- reduces the demand for demerit goods as people fully understand the harms
- perceived benefit goes down and so increases the demand for merit goods as they fully understand the benefits

2. Easy to understand for both adults and children
- labeling and pictures on packaging help people who can’t read or write

3. Information is usually advertised in visible places

4. Shock factor
- information campaigns work best if shocks people

Question 18

Disadvantages of information campaigns

Answer 18

1. Very expensive
- gov have to pay private sector firms to put up information on billboards and may have to pay for celebrity endorsements
- opportunity cost as can’t spend on something else which can lead to pressure on the government budget and may have to allocate money from elsewhere

2. Time lag
- takes time for people to change their behaviors due to consumer inertia
- make question rationality or lack trust

3. Even if info failure is resolved there are still negative externalities that cause market failure due to people not caring
- perceived benefits may not decrease all the way as some people may continue consuming and don’t care about the harms so there is still overconsumption of demerit goods
- even if had correct information some people dont care and so won’t consume something that provides benefits so there is still under consumption of merit goods

4. May not listen to the information given
- if bombarded with information they may be skeptical and question validity
- won’t listen if they believe they have a corrupt government

Question 19

Why is price volatility harmful to producers?

Answer 19

Farmers who mainly produce commodities or impacted a lot as they can’t predict revenue or profit
- less confident and so may invest less into capital which reduces the quality of products
- productivity goes down

Question 20

Why is price volatility harmful to consumers?

Answer 20

Consumers can’t plan their consumption which lowers their confidence
- penalizes low income household as they need to plan and so low as well especially those on zero hour contracts
- when prices increase, have to continue buying the good as it is a necessity so uses up more of their rdy
- less income to spend on other goods and services which lowers standards of living

Question 21

Buffer stock schemes

Answer 21

A scheme intended to stabilize the price of a commodity by buying excess stock in periods were supply is high and selling stock when supply is low

Question 22

What is the upper limit?

Answer 22

A target price set to prevent consumers being charged too much of a price as if it is too high it will hurt to consumer welfare

Question 23

What is the lower limit?

Answer 23

A target price set to prevent producers from not making a profit

Question 24

What happens when the price falls below the lower limit?

Answer 24

If this happens due to favorable weather conditions, increasing supply, the government would buy up stock
- When the price is below the lower limit this would harm produces as they aren’t making a profit
- government steps in and buys up stock from (Q1-Q3) to increase demand, so prices increase back up to the lower limit

Question 25

What happens when the price rises above the upper limit?

Answer 25

If this happens due to unfavorable weather conditions, decreasing supply, the government would release stock
- when the price is above the lower limit this would harm consumers as they have less effective demand
- government steps in and releases stock from (Q1-Q3) to increase supply, so prices decrease back to the upper limit

Question 26

Why is it good to have upper and lower limits?

Answer 26

• allows consumers to know where prices fall and so can plan their expenditure
• prevents prices from going up too much and so protect lower income households
• firms are also more confident about how much profit they can make and so invest more and so quality of quantity of fop increases
• farmers can support their lifestyles and invest in local community which leads to positive externalities

Question 27

Problems with buffer stocks

Answer 27

1. Reliant on a good harvest
- if have a consecutive bad harvest that means supply carries on going down and gets worse
- can’t build a buffer stock and can’t really stock to reduce the impact of a bad harvest
- due to an increasing climate change there are more bad harvests occurring

2. Perishable
- even if you build up a stock it may go bad and has an expiry date meaning that it cannot be released into the market
- would lead to being a waste of money

3. Costly and Unsustainable
- government have to keep on buying stock
- if prices is always below the lower limit government have to keep stepping in and buying stock
- supply gets too high and prices for too low
- can lead to allocative efficiency as have to go to waste if not used up
- firms have to pay for storage of stock

4. Cannot influence global commodity prices
- if you are a single country who doesn’t dominate the economy you don’t have much influence on the global commodity prices
- must accept the global prices as they are price takers not price makers

5. Dumping
- some firms may dump raw materials in other countries for a cost lower than foreign firms cost of productions
- issue for producers in other countries as output would fall and can lose comparative advantage
- leads to structural unemployment and hysteresis

6. Depends on who decides the upper and lower limits
- if the lower limit is set to high, consumers have to spend more of their disposable income
- if the lower limit is set to low, producers won’t be making lots of profits
- some producers have a lot of political power as they are strategic Industries as people rely on them for food so are able to influence a higher upper limit and so can make a higher profit

Question 28

Minimum price

Answer 28

The lowest price a good can be legally set at
- always set above equilibrium price as there is lots of negative externalities

Question 29

What is the impact of a minimum price?

Answer 29

• there is a extension on the supply curve as it is more profitable for firms to supply at a higher price
• there is a contraction on the demand curve as people have less effective demand due to the increasing price

Question 30

Why might the government set a minimum price?

Answer 30

to prevent negative externalities by rationing people out of the market to stop them consuming the good

Question 31

Advantages of a minimum price

Answer 31

1. Reduce negative externalities

2. Better than a tax
- affects all households the same way which reduces income inequality as a tax can be just absorbed by higher income households or avoided

3. Solves market failure
- reduces over consumption

Question 32

Disadvantages of a minimum price

Answer 32

1. Depends upon the elasticities of the good
- if the good is inelastic demand falls less than proportionally which is not beneficial

2. The government might set the price too low or too high
- if it is too low people still have effective demand and still able to consume the negative externality
- if it is too high people lose effective demand and so derived demand for labour decreases, unemployment increases
- could lead it formation of shadow markets

3. Allocative inefficiency
- labour can be misallocated
- always going to be allocative inefficiency when prices are above equilibrium as excess supply
- fop are being used when demand is meeting the level of supply
- worsen the problem of scarcity and economic problem

4. A tax directly generates a revenue but not from a minimum price

5. The gov could impose regulation instead
- further decrease negative externalities and change behaviors

Question 33

Maximum price

Answer 33

The maximum price a good can legally be set at
- always below the equilibrium price as there is a lot of positive externalities

Question 34

What is the impact of setting a maximum price?

Answer 34

• there is a contraction on the supply curve as it is less profitable for firms to supply at a lower price
• there is a extension on the demand curve as people have more effective demand due to the decreasing price

Question 35

Why might the government set a maximum price?

Answer 35

The good may provide a lot of positive externalities
- beneficial as now lower income households can afford basic necessities

Question 36

What problems can result from a maximum price

Answer 36

• can lead to excess demand
• have to rely on inefficient ways such as waiting lists to ration resources when there excess demand

Question 37

The impact a maximum price may have on the level of consumer and producer surplus

Answer 37

Consumer surplus has gone up as consumers have more effective demand at lower prices
- the difference between the price they pay and the price they are willing to pay has increased

Producer surplus has gone down because firms are not willing to sell at lower prices
- may take their product of the market and sell something else which may be more profitable

Question 38

Government failure

Answer 38

When the government intervenes in the economy to correct marke failure but creates further allocative inefficiency and further misallocation of resources

Question 39

Causes of government failure

Answer 39

1. Politics influencing decision making
- due to elections governments may prioritise earning votes
2. Market orientation
3. Unecessary intervention
- exploitation of public services

4. Evolution of knowledge

5. Allocative inefficiency
- due to price controls
- excess demand and supply

6. Unintended consequences of taxes, regulation, subsidies etc

7. Trade off
- increasing taxes may lead to regressive effects

Question 40

Consequences of government failure

Answer 40

1. Opportunity Cost
- when the gov spends on healthcare and education, money is allocated away from other sectors
- difficult to spend on subsidies during a recession making the opportunity cost worse during the recession as the government is not collecting a lot of tax revenue

2. Unemployment
- could lead to unemployment due to too much tax
- people have less income so consumption decreases so demand for labor goes down
- subsidies to firms leads to capital labour substitution which increases structure unemployment
- if minimum prices too high there is a contraction along the demand curve so demand derived demand for labour goes down and unemployment increases
- if there’s too few pollution permits firms produce less so demand for labour goes down so unemployment increases

3. Formation of shadow market
- if government set regulations or ban certain goods
- unsafe as gov cannot put any regulations which increases the amount of negative externalities

4. Extent to which there is government failure/gov dont have perfect info
- if the government doesn’t know where socially optimum is it is hard to measure the size of the externality
- don’t have perfect information makes it harder to set taxes or subsidies