government provision and regulations

Question 1

describe state provision

Answer 1

direct provision of goods and services by government free at the point of consumption (basically public goods)
= used to fox market failure caused by missing market of public goods due to free rider profit and lock of profit incentive

Question 2

describe complete market failure

Answer 2

results in a missing market (such as public goods)

Question 3

describe partial market failure

Answer 3

occurs where a market exists but contributes to resource misallocation such as negative production externalities

Question 4

how can gov reduce risk of market failure?

Answer 4

taxes, subsidies, provide info, max and minimum prices, legislate laws= e.g. minimum amount of education and max amount of pollution per business

Question 5

describe a public-good

Answer 5

• non-rivalry
  = one person’s consumption does not diminish someone else’s consumption. For example: benefiting from a street light doesn’t reduce the light available for others but eating an apple would
• Non-excludability
  = not possible to exclude some individuals from consuming the good. For example, if a dam is made to stop flooding, it protects everyone in the area (whether they contributed to flooding defences or not)

Question 6

why does gov provide public goods

Answer 6

unlikely to be supplied by private firms due to lack of opportunity to make a profit
= due to non-excludable nature of public goods & the free-rider problem
= if government wasn’t providing public goods like street lights it wouldn’t be provided by the market

Question 7

describe the free-rider problem

Answer 7

difficulty of providing a public good or service when some individuals can consume it without contributing to its production or financing
= can result in under-provision or non-provision of the good or service, since those who would benefit from it have little incentive to pay for it.

Question 8

adv of state provision

Answer 8

• corrects complete market failure
• provides goods & services that benefit individuals & the economy
• improves welfare

Question 9

disadvantage of state provision

Answer 9

• expensive & represents an opportunity cost of provision
  = the more hospitals are provided the less budget is available to defence
• prevents price mechanism from happening in a market & represents control over a market
• solves missing market uses to reach maximum welfare
• solves in =equity issues= allows universal access to goods

Question 10

define regulations

Answer 10

laws or rules enacted by gov that must be followed by economics agents to encourage a change in behaviour
= non-market approach

Question 11

examples of command regulations

Answer 11

• ban on smoking in public places
• maximum emissions levels on new cars
• minimum legal age to drink alcohol

Question 12

describe the problem of regulatory capture

Answer 12

• form of government failure
  = happens when a government agency operates in favour of producers rather than consumers
  = often happens when suppliers have significant lobbying power e.g. with government agencies

Question 13

define nationalism

Answer 13

when the ownership of a firm or industry is passed from the private sector to the public section (government)

Question 14

define a moral hazard

Answer 14

situation where an economic agent has an incentive to increase its exposure to risk because it doesn’t bear the full costs of that risk
= e.g. when a firm is insured, it may take on higher risk knowing that its insurance will pay the associated costs

Question 15

issues with state provision

Answer 15

• creates excess demand of free goods= can’t increase prices to ration demand due to universal access
  = can change circumstances eg only get doctor if issue is severe but its subjective and based of opinion= inefficient
• expensive for gov= increase LR funding= increase tax= increase debt interest= increase opportunity cost
• gov has imperfect info= assume SBs and SCs= not always correct= gov failure risk
• efficient state organisations as they lack profit motive= increase costs= not most effective use of public money= increase opportunity costs

Question 16

examples of control regulations

Answer 16

• enforcement
• punishment

Question 17

issues with regulations

Answer 17

• expensive= enforcement and administration costs eg police
• may set wrong regulations that concrete unintended consequences= if too strict can burden firms= decrease profits= firm will leave country= increase unemployment and underproduction= increase prices= force consumers to find alternative supply eg black market= decrease tax revenue= dangerous and illegal for consumers= increase enforcement like police

Question 18

describe regulatory capture

Answer 18

larger firms tend to lobby and work closely with regulators to form mutually respected relationships = share people, info and data= regulators act in favour of producers instead of consumers
= regulators make new rules that can enhance companies in favour by imposing disproportionate costs on competitors

Question 19

issues of regulatory capture

Answer 19

• consumer interests may be harmed if regulators fail to hold suppliers to account and enforce minimum standards of service
• prices will be higher, leading to lower real incomes and regressive effects on lower income households
• dangerous externalities if regulator fails to act= leading to social welfare loss

Question 20

causes of regulatory capture

Answer 20

• asymmetric info= regulators may need critical info from firms eg costs and investments etc
• regulatory agencies may be under-resourced and not have funds to scrutinise industry properly
• info gaps= ppl working for regulator may not understand complexities of industry

Question 21

example of regulator capture

Answer 21

Financial Services Authority= heavily criticised for not monitoring lending activities of commercial banks in run up to 2007-2009 global financial crisis

Question 22

adv of nationalisation

Answer 22

• increase economies of scale= increase productive efficiency= decrease AC= decrease price for consumers
• increase focus on service provision= gov will max social welfare= allocative efficiency at low price= max consumer surplus
• less likely market failures cause by externalities= gov wants to max social welfare= consider full SC and SB when producing= q levels will resemble socially optimum over and under production
• public sector can be vehicle for macro-economic control= more public sector companies means gov can manipulate wages to keep low inflation= if inflation too high, public sector can maintain pay rises or increase pay cuts

Question 23

disadvantage of nationalisation

Answer 23

• risk of diseconomies of scale= if monopoly of public sector creates huge public companies= increase risk of risk of DEOS= cause issues of coordination, communication and motivation= increase AC= loss of PE gains= increase price
• lack of incentive to minimise costs= risk of wasteful production= lower efficiency= increase COP due to less profit motive and low incentive to decrease costs= X inefficiency
• lower supernormal profits= cause dynamic inefficiency= less innovation benefits
• expensive and a burden on taxpayer= pay for maintenance, buying assets from private sector, wages etc
• increased prices lead to lower competition= cause monopoly outcomes due to lack of competitive drive= allocative inefficiency
• risk of moral hazard= taxpayer pay for public sector mistake
• political priorities override commercial issues= may not make investment etc due to risk on GE votes etc= override society’s demand

Question 24

evaluate nationalisation

Answer 24

• funding vs delivery= can either create adv of dis for society
• public private partnerships can be better as provide costs covered by private sector and adv of being able to maintain qual and quan of goods to meet public’s needs
• regulation can just be increased into private instead
• size and objective of firm may not always be profit driven but socially, environmentally, allocatively efficiently instead

Question 25

describe how state provision works

Answer 25

• gov considers full SC and SB allocating resources at Q*
• free of charge at point of consumption
• solves UC and UP issues
• solves equity issues= universal access
• solves missing market issues= reach socially optimum level= reach allocative efficiency= max social welfare

Question 26

describe regulations on market failure

Answer 26

laws or rules enacted by gov that must be followed by economic agents to encourage a change in behaviour

Question 27

describe what a moral hazard is

Answer 27

a situation in which one party engages in risky behaviour or fails to act in good faith because it knows the other party bears the economic consequences of their behaviour

eg. monopoly American banks took risky investments in crash as knew gov would have to bail them out

Question 28

define privatisation

Answer 28

when state run organisations or activity is sold to the private sector= will run forms more efficiently due to profit motive and increased competition to decrease AC

Question 29

adv of privatisation

Answer 29

• increase allocative efficiency due to more competition and drive for the best, efficient product that meets consumers demands of high quality= meet consumer satisfaction
• decrease in X inefficiency (lack of competition i means that AC higher if there was competition)
• efficiency incentive due to profit motivation= lead to dynamic efficiency gains= decrease AC

Question 30

disadvantage of privatisation

Answer 30

• may be limited competition= productive inefficiency= firms not operating at lowest point on AC curve= don’t need to have low costs or high qual due to no competitors= allocative inefficiency
• loss making services like NHS will be cut even if socially desirable= if firms don’t make profit they don’t want to make
• loss of natural monopoly and decrease of economies of scale benefits= productive inefficiency= AC can’t be maximised can’t produce as much= can’t exploit all possible EOS benefits
• firms can ignore positive and negative externalities= private firms follow own self interest

Question 31

evaluate privatisation

Answer 31

• depends on level of competition post privatisation
• depends on level of gov regulations = strong regulation means competitive outcomes. - gov can regulate whether firms are forced to provide certain loss making services
• gov can force regulation to make firms analyse all externalities and take them into account

Question 32

evaluate effectiveness of tax

Answer 32

impact of the tax depends upon:
- The size of the tax
- The elasticity of demand for the product (and availability of substitutes)
- Whether information campaigns are used to supplement the policies

Question 33

evaluate effectiveness of regulation

Answer 33

impact of a regulation depends upon:
- Whether consumers/producers believe the regulation is justified
- The extent to which consumers/producers believe they may be caught
- Penalties for breach of the regulations