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Microeconomics > Govt. Intervention in Markets > Flashcards

Govt. Intervention in Markets Flashcards

(48 cards)

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1
Q

Nationalisation

A

Refers to the process of taking an industry into public ownership.

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2
Q

Pros of Nationalisation (4)

A

Greater Economies of Scale
Greater focus on services that benefit society - AE
Less likely to externality market failure
Macroeconomic Control - ie. change wages to control inflation + Unemployment in the Public sector.

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3
Q

Cons of Nationalisation (7)

A

Risk of Diseconomies of Scale
Lack of incentive to be efficient - X-inefficiency
Lack of supernormal profits - no profit motive / no dynamic efficiency
Expensive to run - burden on tax payers / opp. cost
Low Competition - higher prices
Moral Hazard
Interference of politics

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4
Q

Evaluation of Nationalisation (5)

A

Cost vs benefit - which is greater ?
Would a public private partnership (ppp) be better ?
Regulation could be better than nationalisation ?
How much competition is in the private sector ?
Size of firm, how big is their current EoS ?

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5
Q

Privatisation

A

When state run organisations / activity is sold off to the private sector.

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6
Q

Pros of Privatisation (5)

A

Allocative Efficiency
Reduces X-Inefficiency
Introduction of profit motive
Supernormal Profits - Innovation / dynamic efficiency
Reduced Govt. spending / opp. cost

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7
Q

Cons of Privatisation (4)

A

Reduced access to services - excludability
Job cuts - to resolve X-inefficiency
Profit Objective rather than social welfare
Reduced quality to increase profits

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8
Q

Evaluation of Privatisation (2)

A

Level of competition in new market ?
Regulation

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9
Q

Regulation Definition

A

Rule or Law enforced by the government that must be followed by economic agents to encourage a change in behaviour

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10
Q

Aims of Regulation (3)

A

Protect the interests of consumers
Greater Choice
Lower price

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11
Q

Types of Regulation (4)

A

Bans - eg. Smoking in public
Limits - eg. age limits of alcohol
Caps - Emission’s caps for firms
Compulsory - Vaccinations

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12
Q

How are regulations controlled ? (2)

A

Enforcement - Police
Punishment - Fines

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13
Q

Advantages of Regulation (3)

A

If command / control = strong, incentive to change behaviour towards socially optimal level is strong.

Solves issues in the free-market, non-market solution

Allocative Efficiency / Welfare Gain

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14
Q

Disadvantages of Regulation (4)

A

High costs - admin + enforcement
Too strict - increasing firms costs significant / shut down
Black markets may arise
Inequitable for some firms.

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15
Q

Deregulation

A

When Govt. reduce legal barriers to entry to incentivise new firms to enter the market

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16
Q

Advantages of Deregulation (6)

A

More firms enter the market - increase choice /Con Surp
Competition - lower prices / greater efificiency
Allocative efficiency - P = MC
Productive Efficiency increase
X-Inefficiency reduces
Increased Dynamic Efficiency - supernormal profits

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17
Q

Disadvantages of Deregulation (4)

A

Loss of Natural monopoly - waste of resources - allocative inefficiency
Increased Average costs
Loss of EoS benefit
Formation of local monopolies

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18
Q

Evaluation of Deregulation (4)

A

SR vs LR - Increasing market contestability ?
Other barriers - not just legal barriers eg. technical
Govt. regulation ?
Govt. Information ?

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19
Q

Regulatory Capture

A

When regulators start acting in the interests of the company, due to asymmetric information, rather than in consumer interests.

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20
Q

Arguments for Govt. Intervention in Markets (4)

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A

Provide public / merit goods which are not supplied by private sector

Reduce inequality / poverty by redistribution wealth

Protection of workers / environment

Limit monopoly power

21
Q

Pros of Govt. Intervention in Markets (4)

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A

Provide public / merit goods which are not supplied by private sector

Reduce inequality / poverty by redistribution wealth

Protection of workers / environment

Limit monopoly power

22
Q

Cons of Govt. Intervention in Markets (4)

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A

Govt. Failure

Lack of efficiency / profit motive

Govt. infleuenced by pressure groups / politics

Limits innovation

23
Q

Tools of Govt. Intervention (7)

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A

Indirect Tax
Subsidies
Price Controls
State Provision
Regulation
Extention of Property Rights
Pollution Permits

24
Q

Indirect Tax (defintion + aims)

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A

An expenditure tax which increases the cost of production for firms, however this cost can be transferred to consumers via higher prices.

Resolve Market Failure
Govt. Revenue

25
Types of Indirect Tax
Ad Valorem Specific
26
Pros of Indirect Tax (3)
Govt. Revenue Promote Allocative Efficiency Internalises externality
27
Cons of Indirect Tax (3)
Regressive Potential for inflation - inelastic PED Black Markets may arise
28
Evaluation of Indirect Tax (2)
PED ? Correct Level of Taxation ?
29
Subsidies
A money grant given to producers in order to lower the costs of production and increase supply.
30
Advantages of Subsidy (4)
Increased supply - lower prices / increased quantity Solves under production/consumption Allocative Efficiency Welfare Gain
31
Disadvantages of Subsidy (4)
High costs Opportunity cost on Govt. budget Misuse of subsidy Consumption may not increase - Inelastic PED
32
Evaluation of Subsidy (3)
Size of Subsidiy ? PED ? How firms use subsidy ?
33
Advantages of Max. Prices (5)
Max. price set below market - reduced price Resolve underconsumption Allocative Efficiency Prevent consumers from being exploited by producers Increase competition
34
Disadvantages of Max. Prices (4)
Can lead to shortages - Black Markets High Enforcement Cost Max. price that is too high - consumers still exploited Firms shut down / move abroad Demand > Supply = Shortage
35
Evaluation of Max. Price (5)
Shortage ? Black Markets ? Enforcement ? Setting the right level ? Cost ?
36
Advantages of Min. Price (3)
Reduces over-consumption Protects producers - eg. farmers Allocative Efficiency
37
Disadvantages of a Min. Price (3)
Creates surplus of product - Demand < Supply Higher prices for consumers Govt. have to buy excess supply
38
Evaluation of Max. Prices (4)
PED ? Regressive ? Correct Level ? Black Markets ?
39
Direct Govt. Provision
Where the Government provide goods + services (usually merit goods) for free / largely free to increase social welfare.
40
Advantages of Govt. Provision (3)
Long-term benefits - eg. education / improve HCI Reduce wealth inequality Redistribute income
41
Disadvantages of Govt. Provision (4)
Low Efficiency - no profit motive Cannot use price mechanism to determine what to produce. Opportunity Costs Over-reliance / Free-rider problem
42
Pollution Permits
The Government determine an optimal level of emissions in a given period and allocate permits allowing firms to pollute a certain amount.
43
Advantages of Pollution Permits (4)
Encourage Firms to be efficient / reduce pollution Promote low emmission innovtion Internalise the externality of pollution Permits can be traded - price mechanisms
44
Disadvantages of Pollution Permits (3)
Difficult to determine an optimal level of pollution Creates a new market - potential for failure Admin / Enforcement costs
45
Advantages of extending property rights (4)
Property rights owner can charge for pollution Negative Externality is internalised Money raised can be used for innovation Reduce environmental costs.
46
Disadvantages of extending property rights (4)
Difficult to allocate property rights, eg. water / air Externalities can be felt across multiple nations High enforcement/admin costs Difficult to trace the polluter.
47
Govt. Failure definition
When Govt. intervention leads to a misallocation of resources and a misallocation of resources occurs.
48
Key causes of Govt. Failure (7)
Bureaucracy Conflicting Govt. objectives Asymetric Info Admin Costs Regulatory Capture Time lag External Shocks

Microeconomics (11 decks)

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