Theme 1.4: Government Intervention Flashcards
(15 cards)
Why do governments intervene?
To correct market failure
7 ways in which the government corrects market failure?
“In Summer, Many Tall People Play Rugby.”
(some are more than 1 word)
Indirect tax, subsidies, max and min prices, tradeable pollution permits, provision of public goods, provision of information and regulation.
Where does max price have to be?
Set below the free market price
Where does min price have to be?
Set above the free market price
Key example of minimum price
national minimum wage
3 advantages of tradeable pollution permit
-Government can raise funds by selling their reserve pollution permits. The revenue can be used to clean up the environment.
-Firms have an incentive to invest in clean technology
-Firms are able to bank their excess permits for future use
4 disadvantages of tradeable pollution permit
-Firms may relocate.
-Pass higher costs onto the consumer.
-Competition could be restricted if permits create a barrier to entry.
-Expensive to monitor.
How does state provision of public goods correct market failure?
Government provides the public goods that have positive externalities.
How does provision of information correct market failure?
Government’s ensure that there is no information failure so consumer and firm can make informed economic decisions.
How does regulation correct market failure?
The government could use laws to ban consumers from consuming a good that has negative externalities.
Net welfare loss
An overall loss of economic welfare when compared to the starting position
4 causes of government failure
-Distortion of price signals
-Unintended consequences
-Excessive administrative costs
-Information gaps
Distortion of price signals
The actions of government which distort the operation of the price mechanism and so misallocates resources.
Excessive administrative costs
The social benefits of a policy might not be worth the financial cost of administering the policy.
Information gaps
Where consumers, producers or the government have insufficient knowledge to make rational economic decisions.
