1.4 Govement Intervention Flashcards
What is government intervention
This is where the government intervenes when there is market failure so resources are allocated efficiently.
What is indirect taxation and when can it be used
When the good has a negative externality, the government can introduce indirect taxation to prevent market failure.
What is the effective of indirect taxation
This will cause a fall in supply and increase the costs to the individual. The tax internalises the externality and social welfare is now maximised.
What are the advantages of indirect taxation
● It internalises the externality- the market now produces at the social equilibrium position and social welfare is maximised.
● It raises government revenue, which could be used to solve the externality in other ways.
What are the disadvantages of indirect taxation
● It is difficult to know the size of the externality and so it is difficult to target the tax
● It could lead to the creation of a black market
● If demand for the good is inelastic, then the tax will be ineffective at reducing output.
● Taxes are politically unpopular and so governments may be reluctant to introduce
them.
● They are regressive, meaning they the poor spend a larger proportion of their
income on indirect taxes than the rich do
What is a subsidy
In order to solve positive externalities, the government can introduce subsidies, this helps the good to reach its social equilibrium. This means that social welfare is maximised since the market produces at the output that best allocates resources.
What are advantages of a subsidy
● Society reaches the social optimum output and welfare is maximised.
● They can have other positive impacts, such as encouraging small businesses,
bringing about equality and encouraging exports.
what disadvantages of a subsidy
● The government has to spend a large amount of money, which will have a high opportunity cost.
● As with taxes, they are difficult to target since the exact size of the externality is unknown.
● Once introduced, subsidies are difficult to remove.
how do maximum and minimum prices work
For a maximum price to have an effect, it must be set below the current price equilibrium. For a minimum price to have an effect, it must be above the current price equilibrium.
what are advatntages of maximum and minimum prices
● They can be set where MSB=MSC, so allow for some consideration of externalities, and so help to increase social welfare.
● A minimum price will ensure that goods are affordable, whilst a maximum price will ensure that producers get a fair price. Both of these are able to reduce poverty and can increase equity/equality
What are some disadvantages of maximum and minimum prices
● There is a distortion of price signals and this causes excess supply/demand.
● It is difficult for the government to know where to set the prices, because of the difficulty of knowing the size of externalities and because it will have implications on the size of excess supply/demand.
● Both can lead to the creation of black markets.
What are tradable pollution permits
A pollution permit allows the owner to pollute up to a specific amount of pollution and the government controls how many permits there are so limits the maximum amount of pollution.
How do tradable pollution permits work
Companies have to buy permits in order to pollute so, in an attempt to cut costs and increase profits, companies may use greener technology. Unused permits can be sold to other companies, hence why they are tradeable. Companies exceeding their limit of pollution will face legal action.
What are the advantages of tradable pollution permits
● Since the government caps the number of permits, it is guaranteed that pollution will fall to the targets set by the government. This will maximise social welfare.
● The government can raise revenue by selling permits and by fining firms who exceed their pollution limit.
● This encourages companies to use and invest in green technology.
What are the disadvantages of tradable pollution permits
- This can be expensive to monitor and police, but it will only work if it is monitored well. The government needs to impose fines that are large enough to ensure firms follow the regulation.
● It will raise costs for businesses, and it is likely that these higher costs will be passed onto consumers
What are state provisin of public goods
the government provides these public goods directly through taxation. Similarly, the government can provide merit goods.
What is the reason for state provision of public goods
Public goods are non-excludable and non-rivalry and so the free rider problem says they will be under-provided by the free market, leading to market failure.
What are the advantages of state provision of public goods
● This corrects market failure by providing important goods which would otherwise not be provided.
● It can help to bring about equality, by ensuring everyone has access to basic goods.
● There will be benefits of the goods themselves, for example by providing healthcare, the government ensures that the workforce is healthy and so this can improve economic growth.
What are disadvantages of state provision of public goods
● This is expensive and represents a high opportunity cost for the government. Administration costs are a problem
● Since the market is not involved, the government may produce the wrong combination of goods as consumers can not indicate their preferences.
● The government may be inefficient at production since they have no incentive to cut costs.
What is provision of information
When there is asymmetric information, the government provides information to allow people to make informed decisions. They may also force companies to provide information.
What are the advantages of provision of information
● This helps consumers to act rationally, which allows the market to work properly.
What are the disadvantages of provision of information
● This can be expensive for the government to do, incurring an opportunity cost.
● The government themselves may not always have all the information, so it may be
difficult to inform consumers.
● Consumers may not listen to the information provided due to irrational behaviour.
What is regulation
Governments are able to impose laws and caps to ensure that levels are set where MSB=MSC or to ensure that companies provide full information on products.
What are the advantages of regulation
● This can ensure consideration of externalities, prevent exploitation of consumers and keep consumers fully informed. This will help to overcome market failure and maximise social welfare.
