1:4:1 Government Failure Flashcards
What type of economy is the UK?
A Mixed Economy
What is meant by a Mixed Economy?
Means both private enterprise and the government allocate resources to solve the economic problem
When does the government intervene in a market?
Where there is Market Failure and it attempts to correct this so that resources are allocated more efficiently
Examples of measures the government could take to solve market failure.
- Indirect Taxation
- Subsidies
- Maximum and Minimum Prices
- Trade Pollution Permits
- Regulations
- Provision of Public Goods and Market Information
What are Indirect Taxes?
Are taxes levied on the expenditure of goods and
Which products does the government impose indirect taxes on?
On goods which have significant external costs
Advantages of indirect races to correct market failure.
- 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
Disadvantages of Indirect Taxes to Correct Market Failure.
- 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
What is a Subsidy?
Is a grant provided by the government to encourage the production and consumption of a particular good.
What do subsidies cause?
Significant external benefits
Advantages of subsidies applied to renewable energy markets.
- 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.
Disadvantages of subsidies applied to renewable energy markets.
- 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
Evaluative points for subsidies?
- 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
What is a Maximum Price?
The government may impose a limit on how much prices of certain goods and services can rise
Examples of Maximum Prices schemes.
- House rental markets to help protect tenants from being exploited by landlords.
What goods have had price caps applied to them more recently?
Gas and Electricity
Where is the maximum price usually set?
Below the free market price, causing shortages or an excess in demand.
Advantages of Maximum Prices.
- 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
What are the Disadvantages of Maximum Prices?
- 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.
What is a Minimum Price?
The government may impose a limit on how much prices of a certain goods and services can fall to.
Where have Minimum Prices been used?
- In commodity markets to protect the incomes of farmers.
- Labour markets to prevent the exploitation of workers
How do Minimum price scheme effect supply?
Causes excess supply
What is meant by Guaranteed Minimum Price?
Where the surplus output created is purchased by a government agency at the minimum price. The aim is to protect Producer incomes.
What effect will a Minimum Price set below the free market equilibrium have on the market?
No effect
Advantages of Minimum Prices.
- 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.
Disadvantages of minimum prices.
- 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.
What are Trade Pollution Permits?
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.
When were Trade Pollution Permits introduces?
2005
What was the purpose of Trade Pollution Permits?
To limit greenhouse gas emissions from heavy industry.
What do Pollution Permits cap?
Caps the amount of carbon emissions for the year.
Are pollution permits tradable?
Yes
What does it mean when we say pollution permits are traceable?
Firms can buy and sell the allowances between themselves
How is the amount of trade-able pollution permits allocated?
On the basis of the amount of pollution created before the scheme was introduced
What do Trade-able Pollution Permits incentivise Firms to do?
To invest in clean technology and so reduce carbon emissions in the long term.
What are the advantages of trade pollution permits?
- 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
Disadvantages of Trade Pollution Permits.
- 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
Why are Public Goods not supplied in a free market?
Because of the free-rider problem
What is the free rider problem?
Once the good is provided people are able to Consumer it without paying
Why do private companies not supply public goods?
Because making a profit is difficult because of the free rider problem
Who tends to provide public goods?
The government or state
Why does the government or state provide public goods?
In order to correct market failure.
How are Public Goods payed for?
By taxation
What is major reason for mixed economies today?
- Government Supply Public Goods
- Funding then by taxation
Public goods involve a large element of […………..] consumption
Collective
Do information gaps cause market failure?
Yes
How are Information gaps reduced?
- By government intervention
- Through promotions, using social media etc.
Why does the government want to reduce information gaps?
- 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
What is a Regulation?
Government rules in markets to influence the behaviour of consumers and producers
What are the advantages of Regulations?
- 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
Disadvantages of Regulations.
- 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.
What is Government Failure?
When government intervention leads to an inefficient allocation of resources and a net welfare loss.
What different types of government failure are there?
- Distortion of price signals
- Unintended consequences
- Excessive administration
- Information gaps
Which is more serious government failure or market failure?
Market failure
What is distortion of price signals?
The actions of government which distort the operation of the price mechanism and so misallocates resources
Maximum and minimum pricing are good examples of what?
Distortion of price signals
What effect does Maximum Price Controls have?
- Causes excess demand or shortages
- Long-term both Quantity and quality of a product will be reduced
What is the effect of Minimum Price Controls?
- Leads to an excess supply or surplus
- Minimum Prices also require government expenditure on the surpluses, which has an opportunity cost
What is the Law of Unintended consequences?
The actions of government, producers or consumers will always have effects that are unintended or unanticipated.
Examples of unintended consequences?
- 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)
What are Administration Costs?
The costs which arise in the formulation, monitoring and enforcing of government measures to correct market failure
Why are some government interventions ineffective?
Because administration costs are so high.
Problems with government intervention?
- 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.
Do information gaps lead to government failure?
Yes
How does Information gaps lead to government failure?
Government could make a non-rational decision which leads to an inefficient allocation of resources and a net welfare loss.
Why are regulations used?
To support the other measures (Government interventions) and to set limits on activities that lead to market failure.
