Unit 3 - Government Microeconomic Intervention Flashcards
(28 cards)
Define
Market failure
inefficient allocation of goods and services in the market, when the free market mechanism does not make the best use of scarce resources, by taking into account all of the costs and benefits that are necessary to produce or consume a product.
Describe
Free/Joy rider problem
Individuals have an incentive to avoid paying for the good, hoping others will cover the cost, leading to no one paying for it.
Why is intervention needed?
Market Failure: Private markets may not provide public goods efficiently because they cannot easily charge consumers directly. This leads to under-provision or no provision at all.
Free/Joy Rider Problem: Individuals have an incentive to avoid paying for the good, hoping others will cover the cost, leading to no one paying for it.
Government
.
What are to solutions to market failure?
Provision by the Government: Governments can provide public goods directly, funded through taxation (zero marginal costs).
Subsidies: Governments can subsidise private companies to provide these goods.
Why is government intervention needed for demerit goods?
Market Failure: Consumers may not be fully aware of the negative effects or might ignore them, leading to over-consumption.
• Negative Externalities: Consumption can lead to external costs such as health issues and social problems
Government solutions for demerit goods?
• Taxes: Increase the price to reduce consumption.)
• Regulation: Restrict or ban the use of demerit goods.
• Education: Inform the public about the risks.
Why is intervention needed for merit goods?
Market Failure: Consumers might undervalue the benefits or be unable to afford them, leading to under-consumption.
Positive Externalities: Consumption leads to external benefits such as a healthier and more educated population.
What are the government solutions for merit goods?
Subsidies: Lower the price to encourage consumption.
Provision by the Government: Direct provision to ensure accessibility.
Compulsory Measures: Mandate consumption, such as compulsory education or vaccination programs.
What are price controls ?
Government regulations setting maximum or minimum prices for certain goods and services.
Maximum is below equilibrium
Minimum is above equilibrium
Why are maximum prices set?
- To make goods more affordable and avoid exploitation of lower income earners
- Avoid monopoly exploitation
- Reduce Inequalities
- Recognise wider benefits of consuming eg. Healthy food
What are the potential issues of maximum prices?
- Shortages caused by excess demand
- Encourages Black market selling eg Ticket touts
- Long queues - loss of time and efficiency
- Market attracts less investments are producers leave
Why are minimum prices set?
- To ensure liveable incomes eg minimum wage and exploitation of farmers
- Discourage consumption of demerit goods
- Certain types of imported goods
What are the potential issues of minimum price?
- Can lead to surpluses/excess supply
- unemployment
- Black market incentives
- Producers inefficient
Why is government intervention needed in terms of price controls?
• Equity: Ensure affordability of essential goods and services.
• Market Stability: Prevent extreme price volatility which can be harmful to consumers and producers.
• Fair Wages: Ensure workers are paid fairly to reduce poverty and income inequality.
What are the government solutions for price controls?
• Enforcement of Price Controls: Legal measures to ensure compliance.
• Subsidies or Support Programs: To support industries or workers affected by price controls.
Define
Tax
A compulsory payment which individuals and companies mare to the government.taxes are indirect when incidence can be transferred, and direct when it can not be transferred
Two types of indirect taxes?
Ad valorem taxes - proportion or percentage of price
Specific taxes - Fixed amount per unit
Methods of government provision of information?
- compulsory information on demerit goods
- public health announcements and campaigns
- advice on non prescription medicine
- nutrition and allergy information on food packaging
Why is the difference between income and wealth?
Income is the reward for the services of a factor of production
Wealth the stock of assets that someone builds over time
What is the Gini Coefficient and what does it mean?
It’s a numerical measure of the extent of income inequality in an economy.
If the value is 0, there is income distribution
If the value is 1, all income belongs to one person
Reasons for income and wealth inequality?
- Lack of formal employment opportunities
- Poor Vocational Training
- Lack of investment in education and health sectors
- Poor Infrastructure
- Low Rate of Savings, holds back investment
- Inability to maintain credit to fund small businesses
Define
Minimum wage
A legally mandated lowest hourly wage that employers can pay workers to ensure a basic standard of living for all workers
Effects of Minimum wage
Positive
Reduced Poverty
Liveable Wages
Negative
Higher Unemployment - Demand for labour falls
Legislation has no impact on large informal settlements
No relevance for those who are self employed
Define
Transfer payments
Payments made by the government to individuals without any exchange of goods or services, such as social security, unemployment benefits and welfare
Dependent on how much tax is collected
