1.4 Government Internevtion Flashcards
What is government intervention in the market used for?
To correct market failure
What is indirect taxation?
Taxes on expenditures
What are subsidies?
Payment from the government to a producer to lower their costs of production and encourage them to produce more
How does the government setting a maximum price effect a good? (3)
When consumption or production of a good is to be encouraged
- so it doesn’t become too expensive to produce or consume
- must be set below the free market price otherwise ineffective
How does the government setting a minimum price effect a good?
- when consumption or production of a good is to be discourages
- reducing negative externalities from consuming a demerit good
- set above the free market price otherwise, ineffective.
What are tradable pollution permits?
- permits that limit the amount of negative externalities, in the form of pollution created in industries.
- firms will be allowed to pollute up to a certain amount, allowing any surplus on their permit to be traded
- allowing firms to buy and sell pollution allowances between themselves
What are 3 advantages of tradable pollution permits?
- beneficial to environment in long run by encouraging firms to use green production methods
- government could raise revenue from the permits, because they can sell them to firms. allowing them to use this revenue to be reinvested into green technology
- if firms exceed their permits they can buy more from firms who didn’t use their whole permit, raising revenue for greener firms who might then invest in green production methods.
What are disadvantages of tradable pollution permits?(4)
- It could lead to some firms relocating to where they can pollute without limits, reducing their production costs.
- firms may pass the higher costs of production onto the consumer.
- competition could be restricted in the market, if the permits create a barrier to entry for potential firms
- could be expensive for the government to monitor emissions
Why would the government increase their provision of information?
so they can ensure there is no information failure, allowing consumers and firms to make informed economic decisions.
- however this could be expensive to police
How could the government use regulation as form of intervention?(3)
- laws to ban consumers from consuming a good.
- make it illegal to not do something
these would often provide positive externalities. - if fines are introduced as a form of penalisation a disincentive is applied to break the rule as it would raise the costs of firms, who may pass on costs to consumers
What is government failure?
when a government intervenes in a market then worsens the market failure present or creating a new failure
- may result in a net welfare loss to society
What are the4 causes of government failure?
- distortion of price signals
- unintended consequences
- excessive administrative costs
- information gaps
how is, distortion of price signals ,a cause of government failure?
By distorting the free market mechanism through an inefficient allocation of resources as the market mechanism is unable to act freely.
how are, unintended consequences, a cause of government failure?
when actions of producers and consumers have unexpected, or unintended, consequence.
- consumers may react in unexpected ways to a new policy
- a policy may be undermined making government policies expensive to implement since it is harder to achieve their original goals.
how is, an excessive administrative cost ,a cause of government failure?
the social benefit of a policy may not match the financial cost of administering the policy.
- may cost more than the government anticipated
- government must consider whether the policy is a good value for money
