Gov intervention

Question 1

define nationalisation (public ownership)

Answer 1

occurs when private sector assets are sold to public sector
= the process of taking an industry into the private sector and gov running services themselves
= gov gains control of industry and running of industry
= UK Railways nationalised 1945

Question 2

adv nationalisation

Answer 2

• public sector will focus on serviced provision
  = gov will max social welfare and fulfil needs of society
  = allocative efficiency @ low price
  = max consumer surplus
• state run natural monopoly will have high potential of EoS
  = high productive efficiency gains
  = decrease AC and prices for consumers
• less likely market failures caused by externalities
  = gov intends to max social welfare
  = will consider full SB and SC when producing= Q levels reflect socially optimum output level= minimise over consumption and production
  = less motivated by self interest= high allocative efficiency gains
• public sector can be vehicle for macro economic control
  = gov can manipulate wages to keep inflation under control and high employment in recession

Question 3

disadv nationalisation

Answer 3

• high risk of diseconomies of scale
  = if public sector dominate industry may become too big
  = lead to problems of coordination, communication, motivation etc
  = high AC and loss of productive efficiency gains
• lack of supernormal profit= favour social needs= don’t produce @ high price
  = dynamic inefficiency= lose innovation and tech benefits
• expensive process= burden taxpayer
  = high costs like wages and buying assets from private sector
  = OC of gov £
• lack of comp= less drive for comp prices etc
  = high P and low Q= monopoly outcomes
  = allocative inefficiency
• risk of moral hazard
  = individuals like politicians who take risk don’t bare costs of risk
  = taxpayer bares costs of poor decisions
• political priorities override commercial issues
  = might not take risk due to upcoming elections etc

Question 4

EVAL of nationalisation

Answer 4

• can gov afford?
• are PPPs better?
• don’t need to fully nationalise?
  = cld just enforce stricter regulations
• comp in private sector could create better results in LR
  = depends on concentration ratio
• depends on size and objective of private sector firms
  = large benefits of EoS
  = not all firms are profit maximisers= cld strive for social repsonsbility or allocative efficiency

Question 5

define privatisation

Answer 5

assets are transferred from public sector to private sector to increase comp and profit
= gov sells a firm that’s no longer in their control
= British Airways privatised in UK, now operate in comp market

Question 6

adv privatisation

Answer 6

• make markets more comp
  = firms strive to produce goods that consumers want @ high qual
  = max consumer satisfaction= allocative efficiency
• low x-inefficiency
  = firms will need to decrease costs to remain comp= max profits
• high profit motive drives efficiency incentive
  = lead to dynamic efficiency gains= re-invest over time to gain comp adv
  = good for consumers= more choice and low prices over time

Question 7

disadv privatisation

Answer 7

• no guarantee of immediate comp= may be limited
  = productively inefficient= firms don’t produce @ lowest AC
  = may need to increase prices
• profit motive means firms aren’t willing to be loss making services even if socially desirable= no profit= no incentive= low consumer welfare
• loss of natural monopoly that benefited from high EoS
  = high comp= low EoS benefits= high productive inefficiency
  = AC can’t be minimised which means each firm can’t produce enough to reach full EoS
• externalities are less likely to be considered= risks market failure
• monopolies may still form= exploitative prices

Question 8

EVAL of privatisation

Answer 8

• depends on level of comp post privatisation
• depends on level of gov regulation
  = tight regulations would lead to comp outcomes but weak would creates oligopolies and local monopolies
• depends if regulations force specific price per production of socially desirable goods
  = laws could force firms to take external costs into account
  = tax etc
• depends on normative measure of successful outcome
  = do firms or consumers need to benefit most?, has it damaged gov control?
• not all firms are profit maximisers
  = privatsaion of railways in UK failed as large share of profits were being shared as dividends and not effieciently reinvested

Question 9

define regulation

Answer 9

non-market based approach to market failure enacted by gov, inciting laws and rules that economic agents must follow to encourage a change in behaviour

Question 10

examples of command regulations

Answer 10

• public smoking ban
• age limits on alcohol and smoking
• emissions caps
• fishing quotas

Question 11

examples of control regulations

Answer 11

• enforcement of regulation
• effective punishment e.g. jail= ensures incentive to follow regulations

Question 12

adv of regulations

Answer 12

• incentive to change behaviour of economic agents
  = may produce less de-merit goods
  = move towards Q* social optimum level
• enforces laws to make 18 minimum age to leave school
  = positive externalities of skilled labour workforce
• allocative efficiency produce @ Q*= welfare gains

Question 13

disadv of regulations

Answer 13

• regulation is expensive due to administration and enforcement costs
  = needs policing to monitor whether regulations are being followed
  = if cost can’t be afforded by gov regulations will be very poor and enforcement won’t properly exist
• command must be set @ right level and right strictness to change behaviour
  = if too strict or too relaxed may be unintended consequences of regulation
  = high costs burden firms and decrease profitability
  = firms may leave country and operate where there aren’t regulations
  = increase domestic unemployment
• firms may try to game the system and cheat regulations
  = gov failure
• equity issues
  = pollution caps impact some firms more than others= unfair disadv= country or industry may be natural dependent on fossil fuels
• too paternalistic?
  = decrease choice, liberty and freedom for firms

Question 14

define deregulation

Answer 14

gov reduces legal barriers to entry in industries to incentivise more firms to enter a market

Question 15

adv of deregulation

Answer 15

• more firms can enter market= more comp
• more firms= more consumer choice= satisfy needs and wants for consumers= firms will strive for allocative efficiency and incentive to produce where P=MC to satisfy consumers
  = stay ahead of comp
• high comp= incentive to minimise costs and max profits to stay ahead of comp= productive and x efficiency
• profits will be made
  = dynamic efficiency= re-invest to increase innovation and stay ahead pf rivals to increase market share over time

Question 16

disadv deregulation

Answer 16

• allowing new firms to enter market= lose natural monopoly and increase AC
  = less productive efficiency as EoS benefits decrease
  = cause wasteful duplication of resources= allocative efficiency
• no guarantee of what will happen= could form local oligopolies or monopolies who a base their power
  = increase prices and decrease Q= x inefficiency

Question 17

EVAL regulation

Answer 17

• depends on SR vs LR outcomes
  = if local mon or op form= in LR contestability decreases= failure of policy
• depends on height of other barriers to entry= low legal barriers but high tech barriers to entry wouldn’t increase contestability
• depends on level of gov regulation= may regulate against anti-comp behaviour= would decrease risk of local mon and op

Question 18

describe regulatory capture

Answer 18

• when regulators act in interests of the company due to impartial info rather than in consumers interests
• asymmetric info makes it hard to determine what price level cap should be imposed @
  = wo sufficient info gov cld make poor decisions= lead to waste of scarce resources

Question 19

define indirect tax

Answer 19

tax is charged on producers of goods and services and is paid by the consumer indirectly as firm passes on burden of tax to the consumer through increased prices =VAT, excise duties, carbon taxes, sugar and alochol tax
= use neg externality production and consumption diagram= inward supply shift + tax

Question 20

how do indirect taxes affect production

Answer 20

• gov can impose tax on a demerit good that causes NE in production e.g. carbon tax
• firms increase COP= cause inward shift of supply
  = increase P and decrease Q to Q* and P*
  = less demand and supply for de-merit goods= solve over production of de-merit goods market failure

Question 21

how do indirect taxes affect consumption

Answer 21

• internalise externalities through paying higher prices
  = produce and consume @ allocative efficiency
• increase gov tax revenue
  = can use extra money to educate or advertise to increase info on demerit or merit goods

Question 22

disadv of indirect taxes

Answer 22

• might be price inelastic demand
  = no responsiveness to price change due to addiction or few substitutes
  = Q will decrease proportionally less than the increase in price
  = not enough to solve market failure
• assume gov have perf info to set taxes @ right level
  = unlikely assumption as Govs don’t have perf info over value of NE
  = incorrect tax level= may lead to black markets for consumers to find alternative consumption
• may become regressive on poorer firms who can’t afford high COP
  = high buren= drop out of market and leave country
  = high unemployment and low comp
  =lead to gov failure
• can be considered too paternalistic
  = gov forcing us to do what they want= less liberty and choice

Question 23

define subsidy

Answer 23

money grant given to producers by the gov to decrease COP and encourage an increase in output

Question 24

adv of subsidy

Answer 24

• decrease COP to decrease MPC
  = high Q and decrease P for consumers
  = solve under consumption and production to produce @ Q*
  = max welfare gain
  = allocative efficiency

Question 25

disadv of subsidy

Answer 25

- expensive= high cost to gov = increase gov debt= future tax burden to pay back loan= increase debt interest = burden poor and cause spending cuts in LR= decrease welfare and increase social costs = increase OC of gov £= could be used more productively elsewhere - is subsidy set @ right level?= gov doesn't have perf info of value of positive externality = likely to under or over subsidise= won't reach Q* and fully solve market failure - encourage subsidy dependency= incentivise firms to act inefficiently in order to get subsidy= incentivise inefficiency - no guarantee of how firms will use subsidy= may use to pay off debt, fund salaries or may save etc = won't decrease COP or decrease P= gov failure

Question 26

describe minimum price controls

Answer 26

- a fixed price floor enacted by the gov, ususally set above equilibrum market price - used to provide a guaranteed minimum wages for producers in agricluture etc whose goods are very price volatile = protects production of important goods by providing a stable income for producers and farmers - used to discourage consumption of demerit goods to decrease NE in consumption = used in Canada on alcoholic drinks - gov increases price above equilibrium price @ Pmin= legally prices can't g below it = causes an extension in supply due to incenitve of higher profit margins and guaranteed incomes = but supply is greater than demand= excess supply between Qd and Qs = ineffienct allocation of scarce resources= create burden on producers as high COP to make output yet not sold= decrease profit margins = waste of resources= high cost to destory or store excess output = LR burden on producers = gov tends to buy up excess supply= known as intervention buying - price floor will contract demand to discourage consumption = decrease Q to Q*= socially optimum level of output = internalise NE to solve over consumption and production = reach AE and max welfare

Question 27

disadv of minimum price

Answer 27

- price demand may be inelastic= when P increase D may not fall = decrease in QD will be proportionally less than increase in P = won't decrease Q enough to fix market failure - min prices are regressive= worsen burden on poor= can't afford increase P = widen income inequality in society= gov lose macro objective - consumers look for alternative supply in black market pr smuggle from abroad = uncertainty on qual of goods

Question 28

describe max price

Answer 28

- price may be deemed too high by gov= price ceiling below equilibrium promotes equity for necessity goods e.g. rent in New York and Berlin = leads to low prices= cause extension of demand to increase consumption and equity

Question 29

disadv of max price

Answer 29

- shortage of supply= causes contraction of supply = gov creates excess demand= inefficiency in market = ppl more willing and able to buy accommodation but can't get supply - find supply in black markets @ slightly higher price = dangerous for consumers e.g. exploited by landlords - needs enforcement of producers to stick to price max = needs regulations etc= expensive - if set too low= causes excess demand

Question 30

define state provision

Answer 30

direct provision of goods and services by gov free @ point of consumption e.g. state schools

Question 31

adv state provision

Answer 31

gov provides free service @ Q* = universal access to all consumers= price is 0 = solves inequality issues and under-consumption of demerit goods = reach social optimum level = allocative efficiency @ welfare max

Question 32

disadv of state provision

Answer 32

- causes excess demand when P=0 = hard for gov to ration demand = can do it depending on severity of pain etc for NHS= unfair cause ppl are still in pain = lead to long waiting times and big classes in school due to excess demand - expensive in LR for gov= increase tax and cut gov spending elsewhere = high OC of gov £ - risk of inefficient state run organisations = lack of profit motive increases COP due to inefficient production etc = most effective use of gov £?= x-ineffiency risk and gov failure - Govs don't have perf info= dk social costs and benefits perfectly = realistically won't produce @ Q*

Question 33

describe tradable pollution permits

Answer 33

where gov gives firms a permit which allows them to produce upto a set amount of CO2 each year = they can sell excess permits or buy more from other firms

Question 34

adv of tradable pollution permits

Answer 34

- gov sets pollution cap to limit how much CO2 firms can produce per year = cap set @ Q* - gov issues permits to firms across economy to match cap limit = market for permits created - firms can invest in green tech to increase climate friendly production = externality of polluting will be internalised as firms pays high price of permit in order to cover cost of externalities - w strong enforcement pollution will decrease to socially optimum level= allocative efficiency= create LR incentive for firms to re-invest into green tech - firms create profit motive from selling spare permits

Question 35

disadv of tradable pollution permits

Answer 35

- green tech might be too expensive to invest in - strong enforcement is needed= expensive cost for gov - gov don't have perf info on precise level of externalities = likely to over or under produce= lead to unintended consequences as COP of firms increase= firms could shut down or leave country to produce somewhere where pollution allowed - need for international cooperation for it to work= climate change and pollution isn't a market failure limited to one country = many developing countries won't be willing to sign and agree as COP will be too expensive

Question 36

EVAL of gov int

Answer 36

- depends on elasticity of demand= if inelastic, a big change in price makes a big difference in demand - hard to reach exact right tax level to meet aim - depends on how much tax revenue is raised and how its used= sugar tax is supposedly allocated to fund sports in state schools - does it have regressive impact - make firms too dependent? - state of gov finances

Question 37

describe laffer curve

Answer 37

- cutting taxes will incentivise work and economic growth due to higher tax revenues = shows relationship between economic activity and rate of taxation which suggests there might be an optimum tax rate which maximises total tax revenue but only if gov's main objective is tax revenue max - but if taxes are raised too high, may lead to fall in tax revenue

Question 38

why does tax revenue decrease in laffer curve

Answer 38

- when taxes are high there's great incentive for tax avoidance = seek tax reliefs to make max use of tax allowances = use legal loopholes to avoid paying tax e.g. UK debate over non Dom status which is taxation of overseas income for people living abroad - high tax burden creates incentive to evade tax through non declaration of income and wealth by people and businesses = money would move into shadow economy - brain drain effects = net outward migration of highly skilled labour and high income taxpayers as they seek lower tax %

Question 39

how would laffer curve shift upwards

Answer 39

- in UK, gov decided to freeze income tax allowances to £12,560 a year before paying 20% income tax rate = tax % hasn't changed yet tax revenue to gov has increased due to inflation and pay rises= people are moving into higher tax brackets= gov gets more tax for each % tax rate - gov to introduce strong tax avoidance measures and regulations = regularly review and revise tax codes to close gaps and limit overly generous reliefs (e.g., capital gains exemptions, offshore trusts)