1.2.6 government intervention Flashcards
Government intervention
Where the government becomes involved in a situation in order to help deal with a problem
The need for government intervention
Without government intervention, some businesses might neglect the needs of certain stakeholders
Taxation
Mandatory payments to the government put in incomes, products, etc.
Advantages of taxation
External costs of production and consumption are reduced so consumers can buy goods at lower prices
Disadvantages of taxation
If a certain good is price inelastic (the demand will not be affected), consumers may experience lower living standards or having to spend a higher proportion of their disposable income
Subsidies
Money given from the govt. to firms or individuals
Advantages of subsidies
Acts as an incentive to reduce external costs so that prices can be lower for consumers
Disadvantages of subsidies
Opportunity cost for the government as they could have used the only for other things such as infrastructure, healthcare, etc. and the money may be spent irresponsibly
Fines
Money charged on a firm/individual for doing something prohibited
Advantages of fines
The government gains more revenue and lowers the rate of crimes/penalties as some people may not be able to afford the fines
Disadvantages of fines
Firms and individuals may still continue what they were doing after the fine is paid
Regulation
Management of systems according to rules/trends
Advantages of regulation
Reduces external costs of production
Disadvantages of regulation
It is not easy to make companies obey laws
Pollution permits
Government-issued documents that gives businesses the right to discharge a certain amount of polluting material into the environment
Advantages of pollution permits
Acts as an incentive for firms to improve their technology to emit less pollution which helps the environment
Disadvantages of pollution permits
Pollution is difficult to measure
What can government intervention do
- Promote competition
- Limit monopoly power
- Protect consumer interests
- Control mergers and takeovers
Promoting competition
- Prevents anti-competitive practices (attempts by firms to prevent/restrict competition)
- Encourages the growth of small firms
- Low barriers to entry
- Introduces anti-competitive legislation
What do anti-competitive legislations do?
- Eliminates practices that reduce competition
- Promotes/sustains competition within markets
- Protects the interest of consumers
- Ensures freedom of trade
Protecting consumer interests
- Prevents businesses from:
- Increasing prices to higher levels than they would be in a competitive market
- Price fixing
- Restricting consumer choice by market sharing
- Raising barriers to entry by spending huge amounts of money on advertising, which smaller companies cannot match
Price fixing
Where a no. of firms agree to fix the price of a product to avoid price competition
Minimum wage
Minimum amount per hour which most workers are legally entitled to be paid
Reasons for minimum wage
- Raises the income for low paid workers
- Closes the financial gap between the rich and poor in an economy
- Motivates workers to boost productivity in an economy
Advantages of minimum wage
- Raises the income of low-paid workers
- Benefits disadvantage workers (minorities)
- Reduces inequality and increase fairness
- Workers on low incomes will not have to receive welfare benefits (govt. saves money)
- As incomes rise, workers pay more tax (govt. receives more money)
- Higher wages may motivate workers to boost productivity
Disadvantages of minimum wage
- Workers will receive less welfare benefits
- Workers may need to pay more tax
- May result in job losses is minimum wage increases as firms may not be able to afford hiring as many workers
