LS20/21 - Government Regulation

Question 1

Maximum price

Answer 1

A price set by the govt, below the market eq price
Ex: energy bills, rent

Question 2

Advantages of max pricing

Answer 2

Cheaper prices for consumers

Question 3

Disadvantages of max pricing

Answer 3

• Shortage created - excess demand due to low prices, goods may be sold on a first come, first serve basis, or on seller preference; deemed unfair
• Black market emerges -shortage and exc demand leads to consumers turning to black markets to purchase goods at marked up prices
• Cost of enforcement - opportunity cost for govt
• Difficult to set price at correct level - govt may not have enough information leading to price being set too high or too low
• Rental market - with min price, landlord revenue falls, less money to invest in and maintain property, decline in condition of property, and quality of housing in long term

Question 4

Minimum price

Answer 4

A price set by the govt, above the market eq price
Ex: minimum wage, rationing

Question 5

Advantages of min pricing

Answer 5

Ensures income for farmers and agriculture producers, food stability increased
Can reduce consumption of demerit goods such as alcohol, tobacco

Question 6

Disadvantages of min pricing

Answer 6

• Can create excess supply, as price may be set too high - producers unable to sell goods - potential for losses - waste of resources that couldve been spent elsewhere
• Increases prices for consumers, lowers CS

Question 7

Tradable Pollution Permits

Answer 7

1. A cap/limit is set on the amount of carbon emissions a firm can produce over a period of time
2. The govt allocates pollution permits to firms, allowing firms to pollute up to a certain point, dictated by the permit.
3. These permits can be traded - if a firm is exceeding its limit on emissions, it can purchase more permits in order to pollute more and keep production constant. A firm that doesn’t pollute up to its permit can sell these permits in order to generate more revenue for the firm.
4. A firm can be fined if it pollutes above the permitted level, creating an incentive to purchase permits, or pollute less. The revenue gained from selling surplus permits is also an incentive to pollute less.

Question 8

Advantages of ETS

Answer 8

• Creates incentive for firms to pollute less - if they exceed limits, they will face fines, loss in revenue; if they pollute below limit, no fines and can gain revenue by selling permits
• Incentive to invest in cleaner, pollution reducing technology

Question 9

Disadvantages of ETS

Answer 9

• Information gap - too many permits issued - no incentive for them to pollute less; too little permits issued - firms struggle with production, reduces revenue and international competition
• Produceers may pass added cost onto consumers
• TPPs may be given away for free - missed opportunity for govt to rise revenue
• Opportunity cost for govt in regulating and monitoring the scheme
• Competitiveness reduced - countries like USA and China dont have ETS

Question 10

Regulation

Answer 10

Rule or law enacted by the govt that must be followed by economic agents - used to encourage a change in behaviour

Question 11

Forms of Command

Answer 11

Bans - ex: ban on public smoking
Limit - ex: age limit on drinking alcohol
Caps - ex: carbon caps, fishing caps
Compulsory actions - ex: graphic health warnings on cigarette packets

Question 12

Forms of Control

Answer 12

Enforcement - ex: police force
Punishment - ex: fines, imprisonment