Governemnt Intervention

Question 1

Government intervention on demerit and merit goods (3)

Answer 1

Tax / subsidy
Provide certain goods
Inform society of externalities - advertising

Question 2

Gov intervention on externalities (2)

Answer 2

Tax
Subsidy

Question 3

Aim of a tax (2+)

Answer 3

Internalise the externality
Revenue = offset effect of E = police for alcohol and drugs

Question 4

Example of tax (4)

Answer 4

Landfill tax
Attempts to reflect social cost of using landfill = pollution
Positive - encourages recycling
Negative - encourages illegal dumpling

Question 5

Adavantages of tax (2+)

Answer 5

Revenue
Reduced demand = reduced supply = reduced externality

Question 6

Disadvantages of tax (3)

Answer 6

Difficult to put value on externality
If demand is inelastic - tax has no effect
Firms relocate to avoid tax

Question 7

Why do firms use a subsidy

Answer 7

To encourage the consumption + production of merit good

Question 8

Advantages of subsidy (2)

Answer 8

Price reduced = demand increases = more can afford it
Change preferences to chapter merit good

Question 9

Disadvantages of subsidy (4)

Answer 9

Difficult to put monetary value on externality
Subsidy = opportunity cost
Producers get subsidy = less incentive to be efficient
Inelastic demand

Question 10

What are price controls

Answer 10

Max and minimum prices

Question 11

What is a max price (4)

Answer 11

Prevent market price riding above a certain level
Price ceiling
Increase consumption of merit good = makes it affordable
Below ME

Question 12

Adavantages of max price (2)

Answer 12

Increase fairness + equality
Reduced exploitation of monopolies

Question 13

Disadvantages of max price (2)

Answer 13

Excess demand = black market
Rationing used to allocate

Question 14

What is a minimum price + example (4)

Answer 14

Price floor
Suppliers get fair price
Above ME
CAP - guaranteed min price for agricultural products

Question 15

Advantages of min price (2+)

Answer 15

Producers have min income
Stockpiles = excess supply = used when supply is low or overseas aid

Question 16

Disadvantage of min price (2)

Answer 16

Excess supply = inefficient use of resources/capital
Opportunity cost

Question 17

What is a buffer stock (3)

Answer 17

Stabilises prices and prevents shortages in supply
MP below price floor = gov buys it and stockpiles it until demand increases and price increases
MP above price ceiling = gov sells stockpiles = supply increases and price reduces

Question 18

Problem with buffer stocks (4+)

Answer 18

Min price too high = excessive purchasing to maintain min p
Storage + security of stock = expensive
Deterioration
Producers overproduce because guaranteed min price = waste of resources

Question 19

What is buffer stock theory

Answer 19

selling goods at max price will pay for buying goods at min price

Question 20

What is a state provision - reduce externalities (2)

Answer 20

Gov uses tax revenue to pay for certain g/s so they’re free when consumed
NHS, waste disposal, education, street lights etc

Question 21

Good state provision stops market failure (3)

Answer 21

Gov increase consumption with merit goods
Reduces inequality in access
Redistribution of income = tax wealthier more

Question 22

Problems with state provision (4)

Answer 22

Less incentive for firms to operate efficiently = lack of Price mechanism
Opportunity cost
Public sector = lacks innovation
Taxes higher

Question 23

Drawback to NHS (2)

Answer 23

Free at point of delivery = excess demand
Leads to long wait lists

Question 24

What is a traceable pollution permit (2)

Answer 24

Used to control pollution
Allocate permits to allow firms to emit certain level of pollution

Question 25

Rules of TPP (3)

Answer 25

Firms fined if exceed allowances Firms can buy extra Each year allowances reduce = incentive to lower emissions

Question 26

Adavantages of TPP(4)

Answer 26

Encourages firms to increase efficiency + pollute less Firms with low pollution can sell allowances = money Gov can use fine revenue Internalises the externality

Question 27

Negative of TPP (5)

Answer 27

Difficult to set optimal level of pollution If it’s too high = no incentive for firms to reduce emissions Too low = new firms can’t start Firms can relocate Firms can buy more allowances

Question 28

Reasons for government failure (4)

Answer 28

Unintended consequences Info gap Administrative costs Distortion of price signals

Question 29

What is unintended consequences

Answer 29

Misallocation of resources and net welfare loss

Question 30

Exmaple of unintended consequences (2)

Answer 30

Landfill tax to encourage recycling Increase fly-tipping (illegal dumping) = pollution and resources needed to clear it

Question 31

What is market distortion (3+)

Answer 31

Income tax = disincentive to wrk Subsidies = firms less deficit = remove incentive of profit Price controls = producers overproduce because guaranteed min price = surplus

Question 32

Regulation (2)

Answer 32

Rules enforced by authorities and backed up with legislation Control activities of C/P to change undesirable behaviour

Question 33

Exmaple of regulations (4)

Answer 33

Reduce use of demerit goods = ban or limit scale Reduce power of monopolies = price caps Consumer rights act = protect against info gaps Fines