1.4

Question 1

Define ‘minimum price’ and explain why it may be introduced into a market

Answer 1

A price floor below which the normal market price cannot legally fall. Used to deal with a negative externalities

Question 2

Outline the details of minimum price on alcohol which is in place in the UK

Answer 2

50p mimum price for every unit of alcohol

Question 3

Explain the problems that might be encountered by a government implenting a minimum price

Answer 3

Alcohol is addictive (price inelastic)
Min price is regressive
Could form black markets

Question 4

Define maximum price and explain why it may be introduced into the market

Answer 4

A price, usually set by the gov, which makes it illegal for firms to charge more than a certain price for a given quantity of a product

Question 5

Outline details of the maximum price of MOT’s which is in place in the uk

Answer 5

Maximum price that a garage can legally charge for a cars MOT is £54.85 with no extra VAT on top

Question 6

Explain the problems that might be encountered by a gov implementing a maximum price

Answer 6

Danger of shortages means some consumers are unable to find supplies of the product
Producers may exit the market in order to use their resources to produce goods that are more profitable
If the gov subsidises producers to encourage them to maintain output, there will be a significant cost to the tax payer
Producers may cut costs - reducing service to customer

Question 7

Define government failure

Answer 7

Government failure is intervention that results in a net welfare loss
In other words, the outcome for society is worse with intervention than if left to the market

Question 8

Government Failure - 4 Causes

Answer 8

Distortion of price signals
Unintended consequences
Administration costs
Information gaps

Question 9

Explain how the distortion of price signals may lead to gov failure

Answer 9

Some government policies distort the prices that would otherwise be created by the market (e.g. taxes, subsidies, min/max pricing)

Question 10

Explain how the unintended consequences may lead to gov failure

Answer 10

Policy interventions may lead to effects that are unanticipated
Individuals in society can be unpredictable and may respond to policies in a way that is unexpected
These unintended consequences could be either positive or negative
Examples:
Smoking ban – increased use of outdoor patio heaters, leading to greater electricity consumption
5p plastic bag charge – increased theft of shopping baskets!

Question 11

Explain how the excessive administration costs may lead to gov failure

Answer 11

Sometimes the bureaucracy involved in administering a policy may become very ‘bloated’ and costly
If the costs of administering a policy are greater than the benefits to society of that policy then there is likely to be a misallocation of resources
Example:
Health and safety regulation – a knee-jerk reaction to some health scare may take millions of pounds to regulate for very little benefit (track and trace which cost the UK government £37bn to set up and run)

Question 12

Explain how the information gaps may lead to gov failure

Answer 12

If government officials lack the required information they may struggle to make proper informed decisions
Examples:
Making decisions about the size of an external cost or benefit – how much should the size of a tax or subsidy be?
Identifying the socially desirable level of output in an industry

Question 13

Pollution Permits – Purpose

Answer 13

Government issued permits that allow firms to pollute up to a certain limit
Permits may be traded between firms so that ‘clean’ firms can sell their surplus permits to firms that are more polluting
They reduce pollution at a lower cost than a ‘command & control’ method

Question 14

Pollution Permits – How they work

Answer 14

A fixed number of emission permits is allocated each year to polluting factories
Each permit entitles a firm to emit a set amount of pollution
Permits can be traded – i.e. “cap and trade”
Factories which can reduce pollution for less than the price of a permit can sell spare ones
Factories which find it more expensive to reduce pollution can buy extra permits instead
The number of permits can be reduced over time - the government can buy permits and remove them from the market

Question 15

How can command and control methods be used to reduce carbon emissions

Answer 15

‘Command’ - government identifies pollution targets and sets limits on how much companies can pollute
‘Control’ - government regulates companies and monitors whether are keeping to pollution limits - firms that exceed allowed limits are fined

Question 16

How could indirect taxation be used to reduce carbon emissions

Answer 16

Taxation of carbon emissions is a viable alternative
Each unit of production that creates pollution is taxed, or each actual ton of carbon emitted is taxed
It raises the price of the polluting activity
Ideally the tax should be equal to the external cost - this would increase the MPC to the value of the MSC

Question 17

What are the advantages and disadvantages of using pollution permits instead of ‘command and control’ methods

Answer 17

Adv-
Rewards firms that pollute under the limit
Less harsh for firms that exceed the limit (they wont need to shutdown - less jobs)
Dis-
Costs of monitoring the system to prevent cheating
May favour countries that have most money to buy the permit

Question 18

What are the advantages and disadvantages of using pollution permits instead of taxation

Answer 18

Adv-Allocating efficient- You dont pollute above/below
Firms incentivised to pollute less to sell there permits

Dis- Dont get tax revenue which could be spent on lowering pollution and on other things such as healthcare

Question 19

State Provision – Public Goods
Advantages

Answer 19

Government can provide the exact level deemed optimal by society
Government provision means they can ensure all people have access – i.e. both poor and rich have equal access

Question 20

State Provision – Public Goods
Disadvantages

Answer 20

Government provision may be inefficient
Private firms have an incentive to cut costs to a minimum (due to profit maximising objective)
Government run organisations do not have the same profit objective, so lack the incentive to cut costs
As government is making decisions about the level of supply, rather than the market, the ‘wrong’ mix of goods and services may be produced
E.g. too many resources committed to defence and not enough towards hospital beds

Question 21

What is meant by regulation

Answer 21

Regulation by government (or an agency on behalf of the government) involves setting rules and requirements that must be followed by businesses in particular industries, or across the economy

Question 22

Regulation – Different types

Answer 22

Government regulation could impose maximum levels of pollution
E.g. MOT emissions, factory production
Regulation could ban certain production completely
E.g. CFCs, drugs
Regulation could involve minimum or maximum pricing
Regulation could require companies to provide certain information
E.g. forcing airlines to disclose charges at the start of the booking process rather than at the end

Question 23

Regulation – Advantages + Disadvantages

Answer 23

Adv -
For pollution, it can limit the amount of pollution and incentivise firms to develeop new technology that reduce pollution.
It can limit external costs without an impact on the price
Dis-
Finding the right level of intervention can be difficult as regulation could be too tight or too lax
It must be enforced with laws and regulations thus inspectors may have to be employed to ensure producers/consumers abide by the laws