Public Sector Intervention

Question 1

What are the 6 Reasons of market failures

Answer 1

Externalities
Missing Markets
Imperfect Competition
Lack of information
Immobility of factors of production
Imperfect distribution of income and wealth

Question 2

Describe Externalities

Answer 2

Also known as spill-over effects or third-party effects
Costs and benefits that convert private costs and benefits into social costs and benefits
Costs and benefits which are not included in the market price
Negative and Positive

Question 3

Why are markets incomplete

Answer 3

They cannot meet the demand for certain goods

Question 4

What are merit goods

Answer 4

Goods that are highly desirable for general welfare but not highly rated by the market. They are undersupplied
E.g. Health Care, education

Question 5

What are Demerit goods

Answer 5

Goods that are harmful to society but are highly rated by the market. They are oversupplied.
E.g. Alcohol, Cigarettes

Question 6

What is imperfect competition

Answer 6

When competition is limited by certain producers preventing new businesses entering the market
Barriers to entry are created
Imperfect market does not allow for price negotiation
Businesses charge high price and supply low quantities

Question 7

What is lack of information

Answer 7

Consumers, workers and entrepreneurs do not have the necessary information to make rational decisions

Question 8

How does lack of information affect consumers, workers and entrepreneurs individually

Answer 8

Consumers - Need information in order to maximise benefits
Workers - Need to be aware of job opportunities
Entrepreneurs - Lack of information on costs, availability and productivity of FOP impacts effectiveness

Question 9

Describe immobility of Factors of Production

Answer 9

Labour takes time to move geographically and occupationally to meet the changes in demand
Physical Capital cannot be relocated easily
Structural changes require changes in workers skills, employment and work patterns

Question 10

Describe imperfect distribution of income and wealth

Answer 10

People who have access to capital and have more skills earn more than those who don’t
Discrimination has many negative effects on groups
Market produces goods and services only for those who can afford them

Question 11

What are the 3 effects of market failure

Answer 11

Inefficiencies
Externalities
Monopolies and imperfect markets

Question 12

What are the 2 types of inefficiencies

Answer 12

Productive / Technical Inefficiency
Allocative Inefficiency

Question 13

What is productive inefficiency

Answer 13

When resources are not used appropriately to produce the maximum number of goods at the lowest cost and best quality. Some resources may be wasted

Question 14

What is allocative inefficiency

Answer 14

When resources are not allocated in the correct proportions. Product mix does not match consumers tastes

Question 15

What are the two types of externalities

Answer 15

Negative and Positive

Question 16

What are negative externalities

Answer 16

Externalities that have a negative effect on the consumer such as cigarettes

Question 17

What are the three methods governments use to reduce negative externalities

Answer 17

Carry out campaigns to persuade people from causing negative externalities
Levy taxes on goods that cause negative externalities
Pass laws and regulations to prevent activities that cause negative externalities

Question 18

What are the 3 ways the government encourages positive externalities

Answer 18

Advertising on radio and television
Providing education, health care and other services at low prices or for free
Providing producer subsidies to lower the cost of a product and encourage its usage

Question 19

What is an example of positive externality

Answer 19

Education

Question 20

Describe firms in an imperfect market and what the government does to lessen the effects of these

Answer 20

Firms in an imperfect market supply a limited quantity of goods and services at a very high price
Government uses laws on competition to prevent exorbitant prices, ensure entry to the market is free, prevent harmful collusion and encourage foreign competition

Question 21

What are the 6 reasons why the government intervenes in the economy

Answer 21

Private sector does not provide enough services
Provide public services such as hospitals and schools
Government wants to protect consumers against unfair practices by monopolies
Promote fair treatment of workers and prevent exploitation
Control strategic enterprises e.g. Electricity
Guard against market prices that may be damaging to the economy’s health

Question 22

What are the 6 ways the government intervenes in the economy

Answer 22

Indirect taxes
Subsidies
Minimum Prices
Minimum Wages
Maximum Prices
Welfare

Question 23

What are indirect taxes

Answer 23

A tax paid indirectly by consumers through the purchase of goods and services

Question 24

What are the three types of indirect tax

Answer 24

VAT
Excise duties
Custom duties

Question 25

What are the 3 reasons for indirect taxes

Answer 25

Reduce the demand for a harmful product Raise revenue for the state Limit the impact of imported products

Question 26

Why does the government provide subsidies to producers

Answer 26

Government provides subsidies to producers in order to encourage them to increase the production of certain goods

Question 27

What are the 4 types of subsidies

Answer 27

Producer Consumer Export Employment

Question 28

What are producer subsidies

Answer 28

Subsidies given to suppliers of agricultural products

Question 29

What are consumer subsidies

Answer 29

Payments made by the government so consumers can buy goods they would not normally afford

Question 30

What are export subsidies

Answer 30

How government assists firms in increasing their exports

Question 31

What are employment subsidies

Answer 31

Paid to employers to reduce labour cost and encourage more employment

Question 32

What are 3 reasons for producer subsidies

Answer 32

Promote employment and entrepreneurship Encourage the establishment of new businesses Improve the international competitiveness of domestic industries

Question 33

What are 3 effects of producer subsidies

Answer 33

Increase in quantity supplied and demanded Prices will decrease and more consumers will be able to enjoy the goods Creates uncompetitive industries and these firms will not survive in the long-run, if there are no subsidies

Question 34

What are 2 reasons for consumer subsidies

Answer 34

Reduces price of the product Encourages the use of a particular product that the government feels is in the public interest

Question 35

What are 5 effects of consumer subsidies

Answer 35

Price of a product increases People who receive the subsidy pay less than the original price Those who could afford the original price pay slightly more for the product Overall quantity of the product that is being used increases Government monitors the prices and supply set by the markets to avoid consumer exploitation

Question 36

Why are minimum prices implemented

Answer 36

The state may feel that some prices are too low that they need to assist suppliers This is done by setting a minimum price ABOVE the market price

Question 37

What are the 2 reasons for implementing minimum prices

Answer 37

Enable the producer to make a comfortable profit Encourage the production of essential goods

Question 38

What are the 3 effects of a minimum price

Answer 38

Surplus of the product in the market Surplus results in government buying extra of the product and dumping it locally or abroad Price is higher than if it were left to the market mechanism

Question 39

What is a minimum wage

Answer 39

The lowest price that an employer can pay an employee

Question 40

What are the 6 effects of a minimum wage

Answer 40

Surplus of labour being offered Wage rate increases People are paid a more equitable and fair wage for their services Fall in employment due to higher wage costs Risk of inflation due to firms increasing selling price to adjust for the increased wages Damages the competitiveness of some firms due to higher cost of production

Question 41

What are the 3 reasons for implementing maximum prices

Answer 41

To keep the prices of basic food low in order to ensure the poor have access Prevents consumers being exploited and having to pay excessive prices Keeps prices low and controls inflation

Question 42

What are the 3 effects of a maximum price

Answer 42

Price is lower than it would be if it were left to the market mechanism Deficit / Shortage of the product Leads to black markets

Question 43

What is welfare

Answer 43

The state of well-being of a person

Question 44

What are the 3 characteristics of welfare

Answer 44

Welfare grants are provided for people to meet their basic needs Improving welfare reduces poverty and increases spending on basic food Government provides merit goods and supplements the income of poor people

Question 45

What are the 3 types of social welfare grants

Answer 45

Social Grants Children's social support Special Awards

Question 46

What are social grants

Answer 46

Grants that are paid to people in need E.g. Old age grants, disability grants

Question 47

What are children's social support grants

Answer 47

Care-Dependency grant, foster child grants and child support grant

Question 48

What are Special award grants

Answer 48

Social relief of distress grant and transport relief