Government Intervention Flashcards
1
Q
Why do governments intervene
A
To correct market failure
2
Q
Why is a maximum price set
A
To encourage consumption or production of a good, these prices have to be set below the free market price to have any effect
3
Q
Why is a minimum price set
A
To discourage the consumption of production of a good, e.g. minimum wage. They have to be set above free market price
4
Q
What are tradeable pollution permits
A
they limit the amount of negative externalities created in industries, firms will be allowed to pollute up to a certain amount.
5
Q
What is government failure
A
When a government intervenes but makes market failure worse, this leads to a net welfare loss to society
6
Q
Causes of government failure
A
- Distortion of price signals: Government subsidies could distort price signals by distorting the free market mechanism, this could lead to inefficient allocation of resources
- Unintended consequences: This when the actions of producers and consumers have unexpected consequences to a new government policy
- Excessive administrative costs: Social benefits might be less than cost and not be worth the financial cost
- Information gaps: Some policies might be decided without perfect information which is expensive and time consuming
