Government intervention Flashcards
(56 cards)
1
Q
What does it mean if the UK is a mixed economy
A
- Both private enterprise and the government allocate resources
- To solve the economic problem of what, how and for whom to produce
2
Q
Reasons for government intervention in markets
A
- Support firms: help remain competitive
- Promote equity: reduce opportunity gap between rich and the poor
- Correct market failure
- Collect government revenue: to provide essential services, public and merit goods.
- Support poorer households: redistribute income.
3
Q
When is there government intervention in a market
A
When there is a market failure
4
Q
What do governments attempt when intervening
A
They try to correct market failure so that resources are allocated more efficiently
5
Q
What measures could a government undertake to correct market failure
A
- Indirect taxation
- Subsidies
- Maximum prices
- Minimum prices
- Trade pollution permits
- Regulation
- Provision of public goods
- Provision of market information
6
Q
What are indirect taxes
A
Taxes levied on the expenditure of goods and services
7
Q
What type of goods do the government impose taxes on
A
Goods which have significant external costs (tobacco, alcohol)
8
Q
Advantages of indirect taxes to correct market failure
Level of pollution
A
- Level of pollution should fall as output of the good or service is reduced and price is increased.
- Therefore social optimum position of MSB=MSC can be achieved.
9
Q
Advantages of indirect taxes to correct market failure
Internalisation of indirect tax
A
- Internalisation of indirect taxes:
- Indirect taxes force polluters (both producer and consumer) to pay for the external costs
- This internalises the external costs in the case of pollution
10
Q
Advantages of indirect taxes to correct market failure
Indirect taxes are convenient
A
Indirect taxes are convenient
* They tend to be paid in small amounts in a regular manner
11
Q
Advantages of indirect taxes to correct market failure
Tax funds raised for the government
A
- Tax funds raised for the government
- This can be used to clean environment
- This can be used to compensate pollution victims
12
Q
Disadvantages of indirect taxes to correct market failure
A
- Difficult to quantify external costs and place a monetary value on them. So the social optimum position may not be achieved.
- Increased costs of production for firms due to indirect taxes
This makes firms less competitive internationally. - Firms may relocate to other countries with less restrictive taxes on production
13
Q
What is a subsidy
A
A grant provided by the government to encourage the production and consumption of a good or service
14
Q
Where are subsidies often applied on
A
- Goods or services with significant external benefits
- E.g education and healthcare
- E.g renewable energy to create less pollution
15
Q
What is the effect of the subsidy for the renewable energy good
A
To lower the price of each unit from Pe to P1 and to increase quantity from Qe to Q1
16
Q
Advantages of subsidies applied to renewable energy markets
A
- Reduce air pollution and other external costs
- Internalises external benefits from renewable forms of energy by working with market forces
So social optimum level of output can be reached - Subsidies on renewable energy generation promote sustained economic growth
- Reduction of consumption of non-renewable energy resources
17
Q
Disadvantages of subsidies
A
- Unintended consequences may occur E.g firms may become dependent on subsidies = inefficient in production without subsidies
- Opportunity cost to government subsidies may lead to higher taxes or cuts in government spending
-They may be a waste of money
E.g many subsidised bus services operate with hardly any passengers
18
Q
evaluation of indirect taxes
A
- depends on impact on different interest groups
19
Q
evaluation of subsidies
A
- depends on magnitude of the event
- e.g government subsidies in the renewable energy market
- this will depend on how large the subsidies are as a proportion of total production costs for firms
20
Q
Define maximum price
A
A ceiling price set by the government on a good or service above which it cannot rise
21
Q
Examples of maximum price schemes
A
- Governments have tried different types of rent control – keeping the cost of renting below a certain level.
- With monopoly power, train companies could increase the peak tickets, but governments may impose a maximum price (or maximum price increase on firms) to keep tickets affordable – even if it leads to over-crowding.
22
Q
Where is the maximum price usually set
A
set by the gov below the existing free market equilibrium price
23
Q
Advantages of maximum prices
A
- prevent an increase in the country’s rate of inflation.
- prevent exploitation of consumers by monopolies
- enable consumers on low incomes to be able to afford to buy a product.
24
Q
Disadvantages of maximum prices
A
- difficult for the government to monitor and enforce price controls in markets.
- shortages = consumers unable to find supplies of the product
25
What is a minimum price
producers receive a certain price for their product or that consumers have to pay atleast a set price for the product
26
Where have minimum price schemes been used
- minimum hourly wage rates in the labour market
- goods to deter consumption (demerit goods)
27
Minimum price effect on agriculture
- The EU had a Common Agricultural Policy (CAP) which aimed to increase the income of farmers by setting minimum prices.
28
Where is the minimum price usually set
above the existing free market equilibrium price
29
How does a government agency respond to excess supply
1) Agriculture markets:
- purchase the excess supply and export it
2) Demerit markets: producers will lower their output to match the QD at the minimum price
30
What will happen if a minimum price is set below the free market equilibrium price
Nothing happens;
31
Advantages of minimum prices
- producers know in advance the price they will receive for their product.
- Prevent exploitation of producers by wholesalers and retailers who have significant buying power.
- producers can plan investment and output
32
Disadvantages of minimum prices
- if minimum price is set too high = more surpluses
- costs of storage
- encourage over-production = inefficient allocation of resources.
33
What are tradable pollution permits
rights to sell and buy actual or potential pollution in artificially created markets.
34
Why did the European Commission(EC) set up the ETS (emissions trading system)
to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively.
35
Why are pollution permits tradable
permits may be traded between firms so that 'clean' firms can sell their surplus permits to firms that are more polluting.
36
Advantages of tradable pollution permits
- incentive for firms to reduce pollution
- costs of administrating these schemes are low
- planned reduction in pollution over time.
37
Disadvantages of tradeable pollution permits
- large efficient firms buy up permits and continue to pollute
- need to be internationally enforced to be effective
- pollution will continue at a lower level than previously
38
What is the state provision of public goods
policy response to the lack of provision of public goods by the free market, is for the government to provide them , financed through taxation
39
What is the purpose of state provision of public goods
- beneficial to society
- e.g roads, parks, lighthouse, national defence
40
What is the purpose of state provision of information
Governments can set up information portals , reduce asymmetric information
e.g job centres, consumer rights websites.
41
Define regulation
create rules to limit harm from negative externalities of consumption/production.
e.g. OFSTED
42
What is the Environmental Protection Act 1990
keep specified land clear of litter and refuse, and on local authorities and the Secretary of State to keep clean public highways for which they are responsible.
43
Advantages of regulation
- limit the amount of pollution
- incentive for producers to develop new technologies that reduce pollution.
- limit external costs
44
Disadvantages of regulation
- limits consumer sovereignty
- needs to be properly enforced/ employed to ensure.
45
Define government failure
When government intervention leads to an inefficient allocation of resources and a net welfare loss
46
Causes of government failure
- Distortion of price signals
- Unintended consequences
- Excessive administration costs
- Information gaps
47
What is the distortion of price signals
Government actions which distort the operation of the price mechanism leading to a misallocation of resources
48
Define law of unintended consequences
The actions government, producers or consumers will always have unintended effects
49
Unintended consequence of indirect taxes
- May lead to development of illegal markets
- E.g alcohol smuggling
-This leads to growth in organised crime and a loss of tax revenue for the government
50
Unintended consequence of subsidies
- May lead to firms becoming dependent on subsidies and inefficient in production
-Difficult to withdraw subsidies once they are in place
E.g grants to rail companies
51
Unintended consequence of max price controls
- May lead to acute shortages of goods and services
E.g max wage on highly skilled workers; Could lead to a shortage of specialised workers in the banking sector
-This could undermine economic growth
52
Unintended consequence of min price controls
- May lead to surpluses of goods and services
E.g a min wage for lowly skilled workers:Could lead to unemployment as labour becomes too expensive for firms to employ
53
Unintended consequence of trade pollution permits
- May not reduce carbon emissions easily
- E.g large polluting firms may find it easier and cheaper to buy spare permits on the market
Rather than investing in expensive equipment to reduce carbon emissions
54
Unintended consequence of regulations
- May lead to regulatory capture
- This is where the regulator acts in the interest of firms rather than of consumers, even though the regulator is meant to protect consumers
55
Define administration costs
The costs which arise in the monitoring and enforcing of government measures to correct market failure
56
Define government information gaps
decision makers do not have perfect information and face political pressures.
