policies and govt intervention. Flashcards
(17 cards)
advantages/disadvantages of a free market:
The system is automatic due to the invisible hand.
high motivation.
high levels of inequality.
externalities.
advantages/disadvantages of a command economy market:
provides a minimum standard of living.
less wastage of resources.
impossible for the state to make so many decisions correctly.
Decision making will be slow.
How can government tackle information failure?
1. Provision of information - Public health campaigns
- Regulation - Laws can be used to require the disclosure of certain information or ban misleading advertising. Compulsory labeling of ingredients.
how government can correct market failure by imposing a tax:
production externality.
the government imposes a tax on the production of petrol cars. MPC curve shifts left. this increases the private costs of the producer. the free market level of output decreases from Q1 to QT. prices increase from P1 to PT. This results in a samller deadweight welfare loss to society. the extermality has been internalised (making producers pay for it).
Explain breaking up monopolies as intervention to control monopolies?
Break the monopoly, supply will increase as output is not restricted. fall in price. more firms in the. aret assuming there is many buyers. competition will increase and prices will falll further.
EVAl:
- Might create duopoly and lead to collusion.
- Only works if they ban the monopoly from entering htat market again.
- Reduces incentive for dynamic efficiency.
Explain price regulation as intervention to control monopolies?
Maximum price. max price has recently ben used in the energy sector. monopolies set price at P1, which is allocatively inefficient. reduces consumer surplus. pc and qc show the competitive price and output. The govt sets a price of pc if they have perfect inormation. bring prices down and increase consumer surplus.
EVAl:
- dont have perfect info. too close - no effect on prices. too far - loss making and firm leaves the market.
- distortion of price signals.
Explain profit regulation as intervention to control monopolies?
Profit is capped. Impose a windfall tax. used in the energy industry. used when coduct of firm goes againt consumer interest. use that money to subsidies new new firms or energy prices.
Eval:
- one off tax. not a long term solution.
- any tax will disincentivise dynamic efficieny.
- perfect information on how much to tax.
Explain quality standards as intervention to control monopolies?
The regulator insists on a minimum anount of quality. This will ensure that consumers are not being exploited and are unsafe.
EVAL:
- Hugher prices due to higher costs. compliance with the regulation.
- only works if the fines are big enough.
- high administrative costs - inspections.
Explain performance targets as intervention to control monopolies?
Monopolies have to reach these targets.
EVAL:
- fine has to be big enough.
- dont know what to set the number to.
havent worked in the past as they were not enforced and so they didnt face any sanctions.
explain deregulation to increase contestibility and competiton.
Reduce barriers to entry - health and safety laws, labour laws, red tape and easier planning permission. All of these reduce costs and encourage competition.
Eval:
- may lead to collusion.
- has to be large scale deregulation for it to have an effect.
- give incumbment firm alot more power, which they can use to strenthen their position.
- negative externalties - comprimises health and safety.
- There are other barriers to entry.
explain privatisation to increase contestibility and competiton.
national assests are transferrd to the private sector. profit incentive encourages firms to enter the market.
Eval:
- shouldnt promote competition to a natural monopoly.
- externalties.
explain subsidies to small business to increase contestibility and competiton.
subsidise small business. costs fall so they increase output as they have a profit incentive. quantity supplied increases and gain market share. prices fall due to competition.
EVAL:
- wont beenfit from EOS like monopoly firms.
- opportunity costs. unlikely to happen as government is cutting speding.
explain deregulation as a policy to deal with collusion?
Loosen laws. planning permissions, health and safety, labour laws. this will reduce barriers to entry. new entrants are not a part of the collusive agreement. they will set a lower price and not restrict output. this will lead to more market share and so the colluion will break down as they will be unprofitable. this will lower prices in the industry. leads to more choice for customers.
EVAL:
- there are stil high start up costs. hesistant to join the market if there are sunk costs.
- Can be dangerous if they remove health and safety laws. quality will fall.
explain fines as a policy to deal with collusion?
Implement heavy fines. deter firms form taking part in collusive agreements as it is less rational. because if they caught, their costs will go up significantly. The net gain from the collusion can be measured by the extra profits - the penalty times by the chance of getting caught. Therefore, firms are less likely to take part in the collusion and not restrcit output. This would benefit the consumers from lower prices and more choice.
EVAL:
- detecting collusion is hard. minimla evidence to back it up. especially if it is tacti collusion and there is no direct comunication. so not effective in reducing collusion.
conclusion:
incentive to become whistlebllwer and face less penalty. this would reduce the amount of collusive agreements.
Explain Tax on fuel as government intervention to reduce carbon emissions?
A tax on petrol would increase its price. shown on a supply and demand diagram where supply would shift to the left. This is becuase costs of producitions will increase for firms. Quantity supplied will fall from q1 to q2, leading to a rise in prcie from p1 to p2. Case of excess demand and so producers increase price due to theirprofit incentive. This is significatn as the petrol is a price inelastic good. The burden of the tax will fall more on the consumers, as shown by the areas. Signifiant fall in consumer surplus and so people will be rationed out of the market. Therefore, people will switch to cheaper substitutes like bike, correcting market as the welfare loss to soicety falls.
EVAL:
- people wont sell cars. so will continue to buy petrol.
- regressive. public trasnport outside londong may not be good. this will harm more of the low income people outside of london who have no substitutes.
Explain subsidies to electric cars as government intervention to reduce carbon emissions?
Subsidies are used to lower the costs of production for firms. This way, firms can increase production as they have a profit incentive. this can be shown on a diagram by a shift in supply to the right. Qty supplied to move to q2. And as there is a case of excess supply, firms will drop prices to P2. A rise in consumer surplus indicates that the deamnd for electric cars has risen, meaning more people are buying them or switcihing from petrol cars as lower prices is more attractive. as electric cars to emit carbon emmisions, a rise in qty supplied will lead to less carbon emmisions caused by road transport.
EVAL:
- subsidising a large industry incurrs a huge opportunity cost. Will needs lots of money for the subsidy to have an effect on qty supplied - equal to the size of the deadweight welfare loss. Unlikely to happen as other sectors are facing bigger challenges like healthcare. Alongside UK high national debt, subsididng will cause more harm than good.
- Disincentivised as electric car infrastucture isnt good. charging stations arent available across the country and fuel is easily available, so its more convenient.
