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Economics - Micro > 1:4:1 Government Failure > Flashcards

1:4:1 Government Failure Flashcards

1
Q

What type of economy is the UK?

A

A Mixed Economy

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2
Q

What is meant by a Mixed Economy?

A

Means both private enterprise and the government allocate resources to solve the economic problem

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3
Q

When does the government intervene in a market?

A

Where there is Market Failure and it attempts to correct this so that resources are allocated more efficiently

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4
Q

Examples of measures the government could take to solve market failure.

A
  • Indirect Taxation
  • Subsidies
  • Maximum and Minimum Prices
  • Trade Pollution Permits
  • Regulations
  • Provision of Public Goods and Market Information
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5
Q

What are Indirect Taxes?

A

Are taxes levied on the expenditure of goods and

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6
Q

Which products does the government impose indirect taxes on?

A

On goods which have significant external costs

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7
Q

Advantages of indirect races to correct market failure.

A
  • Polluters pay, helping internalise External Costs
  • Work with market forces so choice still exists in terms of consumption and production
  • Level of pollution should fall as output of a good is reduced
  • Tax funds are raised for the government and can be spent on environment projects
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8
Q

Disadvantages of Indirect Taxes to Correct Market Failure.

A
  • Difficult to quantify external costs and put a monetary value of them.
  • Indirect taxes increase the costs of production for firms making them less competitive than firms abroad
  • Widespread use of indirect taxes may be inflationary
  • Firms May relocated to other countries
  • Demand for Good May be price inelastic so pollution may not be lowered
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9
Q

What is a Subsidy?

A

Is a grant provided by the government to encourage the production and consumption of a particular good.

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10
Q

What do subsidies cause?

A

Significant external benefits

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11
Q

Advantages of subsidies applied to renewable energy markets.

A
  • Subsidies can reduce other forms of external costs
  • Subsidies on renewable energy promote sustained economic growth
  • Rate of consumption of non-renewable energy resources is reduced
  • Subsidies work with market forces and help internalised external benefits.
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12
Q

Disadvantages of subsidies applied to renewable energy markets.

A
  • Difficult to quantify external benefits and then place a monetary value on them.
  • There is an opportunity Cost to government subsidies
  • Unintended consequences may occur, Firms may be dependant upon Subsidies
  • External costs associated with provision of renewable energy sources, eg, noise and visual pollution
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13
Q

Evaluative points for subsidies?

A
  • Consider the magnitude of the Subsidy, how large the Subsidy is how much it will effect the business of total production costs for firms.
  • Long run and short run effects
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14
Q

What is a Maximum Price?

A

The government may impose a limit on how much prices of certain goods and services can rise

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15
Q

Examples of Maximum Prices schemes.

A
  • House rental markets to help protect tenants from being exploited by landlords.
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16
Q

What goods have had price caps applied to them more recently?

A

Gas and Electricity

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17
Q

Where is the maximum price usually set?

A

Below the free market price, causing shortages or an excess in demand.

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18
Q

Advantages of Maximum Prices.

A
  • They can reduce exploitation of consumers, especially were lack of competition exists
  • They can reduce inequality, in the case of salaries
  • They help people on low incomes to afford key products
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19
Q

What are the Disadvantages of Maximum Prices?

A
  • Unintended consequences may occur, eg, government intervention distorts the operation of the price mechanism, causing excess demand and inefficient allocation of resources
  • Producer surplus falls and so producers have less income with which to invest
  • Problems arose over how to allocate supply to meet the excess demand in the market.
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20
Q

What is a Minimum Price?

A

The government may impose a limit on how much prices of a certain goods and services can fall to.

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21
Q

Where have Minimum Prices been used?

A
  • In commodity markets to protect the incomes of farmers.

- Labour markets to prevent the exploitation of workers

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22
Q

How do Minimum price scheme effect supply?

A

Causes excess supply

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23
Q

What is meant by Guaranteed Minimum Price?

A

Where the surplus output created is purchased by a government agency at the minimum price. The aim is to protect Producer incomes.

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24
Q

What effect will a Minimum Price set below the free market equilibrium have on the market?

A

No effect

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25
Q

Advantages of Minimum Prices.

A
  • Can Reduce the consumption of goods which are harmful to consumers and have high external costs
  • Encourage to switch to making merit goods
  • Reduce fluctuations in food prices and so make it easier for consumers to budget their income
  • Guaranteed Minimum Price Can stabilise and Increase Producer incomes, leading to greater investment and employment.
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26
Q

Disadvantages of minimum prices.

A
  • Unintended consequences may occur, government intervention districts the operation of the price mechanism, leading to excess supply and inefficient allocation of resources.
  • Price of some goods could increase, reduces consumer surplus.
  • Minimum Prices May be less effective in reducing demand for inelastic products
  • A guaranteed minimum price scheme leads to the government buying up surpluses, which creates an opportunity Cost, raise taxes or cut government spending.
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27
Q

What are Trade Pollution Permits?

A

Pollution permits that can be bought and sold in a market, they are an attempt to solve the problem of pollution by creating a market for it.

28
Q

When were Trade Pollution Permits introduces?

A

2005

29
Q

What was the purpose of Trade Pollution Permits?

A

To limit greenhouse gas emissions from heavy industry.

30
Q

What do Pollution Permits cap?

A

Caps the amount of carbon emissions for the year.

31
Q

Are pollution permits tradable?

A

Yes

32
Q

What does it mean when we say pollution permits are traceable?

A

Firms can buy and sell the allowances between themselves

33
Q

How is the amount of trade-able pollution permits allocated?

A

On the basis of the amount of pollution created before the scheme was introduced

34
Q

What do Trade-able Pollution Permits incentivise Firms to do?

A

To invest in clean technology and so reduce carbon emissions in the long term.

35
Q

What are the advantages of trade pollution permits?

A
  • Firms are able to save their excess pollution permits for use in future years
  • Pollution Permits can be reduced over time.
  • National Government can raise funds by selling their reserve pollution permits.
  • Firms have an incentive to invest in clean technology
36
Q

Disadvantages of Trade Pollution Permits.

A
  • Information gap may cause the EU to issue too many or few Trade pollution permits, little incentive for firms to reduce pollution if too many are issued
  • Firms May pass the costs of purchasing pollution permits onto their customers
  • Currently only the EU is doing this if other countries continue to pollute global emissions will continue to increase
37
Q

Why are Public Goods not supplied in a free market?

A

Because of the free-rider problem

38
Q

What is the free rider problem?

A

Once the good is provided people are able to Consumer it without paying

39
Q

Why do private companies not supply public goods?

A

Because making a profit is difficult because of the free rider problem

40
Q

Who tends to provide public goods?

A

The government or state

41
Q

Why does the government or state provide public goods?

A

In order to correct market failure.

42
Q

How are Public Goods payed for?

A

By taxation

43
Q

What is major reason for mixed economies today?

A
  • Government Supply Public Goods

- Funding then by taxation

44
Q

Public goods involve a large element of […………..] consumption

A

Collective

45
Q

Do information gaps cause market failure?

A

Yes

46
Q

How are Information gaps reduced?

A
  • By government intervention

- Through promotions, using social media etc.

47
Q

Why does the government want to reduce information gaps?

A
  • Encourage the production and consumption of healthy products
  • Discourage the production and consumption of unhealthy goods and services
  • Notify and remind people of paws for their own protection, eg, seatbelts
48
Q

What is a Regulation?

A

Government rules in markets to influence the behaviour of consumers and producers

49
Q

What are the advantages of Regulations?

A
  • Simple to understand
  • Limits can be imposed on the operation of firms to protect consumers
  • It is possible to fine or close down companies that have abused the regulations
  • Fines Act as a deterrent for both consumers and producers not to break the law
50
Q

Disadvantages of Regulations.

A
  • Regulations can be expensive to monitor.
  • Regulations May he set at the wrong level to correct market failure
  • Regulations May Increase the production costs of firms and make them less competitive in global markets, especially against firms in countries with few regulations.
51
Q

What is Government Failure?

A

When government intervention leads to an inefficient allocation of resources and a net welfare loss.

52
Q

What different types of government failure are there?

A
  • Distortion of price signals
  • Unintended consequences
  • Excessive administration
  • Information gaps
53
Q

Which is more serious government failure or market failure?

A

Market failure

54
Q

What is distortion of price signals?

A

The actions of government which distort the operation of the price mechanism and so misallocates resources

55
Q

Maximum and minimum pricing are good examples of what?

A

Distortion of price signals

56
Q

What effect does Maximum Price Controls have?

A
  • Causes excess demand or shortages

- Long-term both Quantity and quality of a product will be reduced

57
Q

What is the effect of Minimum Price Controls?

A
  • Leads to an excess supply or surplus

- Minimum Prices also require government expenditure on the surpluses, which has an opportunity cost

58
Q

What is the Law of Unintended consequences?

A

The actions of government, producers or consumers will always have effects that are unintended or unanticipated.

59
Q

Examples of unintended consequences?

A
  • Indirect Taxes (lead to development of illegal markets, growth in organised crime)
  • Subsidies May lead to firms becoming dependant upon them and inefficient in production, Difficult to withdraw subsidies once they are in place)
  • Maximum Price Controls (May lead to shortages of goods and services)
  • Minimum Price Controls (May lead to surpluses of goods and services)
  • Trade Pollution Permits (May not reduce carbon emissions so easily)
  • Regulation (May lead to regulatory capture, where the regulations act in the interest of firms instead of consumers who they are meant to act for)
60
Q

What are Administration Costs?

A

The costs which arise in the formulation, monitoring and enforcing of government measures to correct market failure

61
Q

Why are some government interventions ineffective?

A

Because administration costs are so high.

62
Q

Problems with government intervention?

A
  • Tax enforcement and collection can prove difficult and expensive for government
  • Welfare Benefits are difficult to calculate and monitor to make sure the right claimants receive the right payments
  • Regulations require constant monitoring to ensure they are adhered to.
63
Q

Do information gaps lead to government failure?

A

Yes

64
Q

How does Information gaps lead to government failure?

A

Government could make a non-rational decision which leads to an inefficient allocation of resources and a net welfare loss.

65
Q

Why are regulations used?

A

To support the other measures (Government interventions) and to set limits on activities that lead to market failure.

Economics - Micro (32 decks)

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