1.4 Government Intervention Flashcards
How can the government correct market failures caused by externalities?
They must bring the externalities into the market mechanism. This can be done by either..
- imposing regulations on negative externalities
- imposing taxes
How can the government correct market failure caused by public goods?
The government can subsidise firms or local authorities to provide the public good.
How can the government correct market failures caused by imperfect market information? (2)
- The government provide information or launch campaigns
- They could regulate markets so firms have to show information on packaging
Define government failure
A misallocation of resources arising from government intervention that worsens a market failure, or creates a new market failure. Results in net welfare loss.
Define indirect tax
A tax levied on expenditure on goods or services
How can sales taxes cause market failure?
When indirect taxes are levied, supply shifts to the left, causing a movement away from the equilibrium , which previously represented an ideal allocation of resources. (Distortion of price signals)
Define the term internalising the externality
An attempt to deal with an externality by bringing an external cost or benefit into the price system. Make firms pay.
What is the first approach of government intervention when tackling pollution?
Imposing an indirect tax that makes it so the MSC is equal to the MPC
How can a carbon tax be shown on a diagram?
- Negative externality diagram
- MPC shift inwards towards MSC
Why is it difficult to measure the MSB of reducing pollution? (2)
- You cannot easily quantify the health and environmental benefits
- Different parties would have different evaluations and viewpoints
Why is it also difficult to measure the costs of reducing pollution?
Because different firms would operate at different levels of efficiency , so would be affected by pollution taxes differently.
What is an alternative method of combatting pollution?
Explain this method.
Using trade pollution permits.
The government sells or issues permits to firms, allowing them to pollute up to a certain limit. Those firms who do not fully use their permit can sell it to other firms.
What are two advantages of trade pollution permits?
Firms are incentivised to produce less pollution. This addresses the externality problem, instead of overriding the market.
The government can control how many permits they issue, enabling them to control the overall level of pollution.
What are two disadvantages of trade pollution permits? (2)
- It may be difficult for authorities to monitor levels of pollution
- It may be unfair, given the richest firms will be able to pollute as much as they like, as they can afford to buy many permits
What is a counter-argument to rich firms being able to afford many permits?
The highest polluting firms may tarnish their reputation, which may strengthen its incentive to reduce pollution.
What global event took place in 1997?
Which major country did not sign it?
How did countries go about cutting emissions?
The Kyoto Summit took place, where 178 countries agreed to cut CO2 emissions by a certain percentage by 2010.
USA
Tradable permit system
Following another meeting in 2012, which major country could not agree on the terms of the Kyoto protocol?
China, now the world’s biggest greenhouse gas emitter
Define NIMBY syndrome
Not In My Back Yard
A syndrome under which people are happy to support the construction of a facility as long as it is not in their own area
What is an advantage for the government of implementing taxes?
Increases government revenue that can be spent in the economy and reduces the budget deficit.
Why is it important that the government maintains an appropriate balance between public and private sector spending?
- If the private sector does not have access to public goods , such as rail, unnecessary costs will be passed onto firms, making them less internationally competitive.
- If the government over-invests in the public sector, less resources will be available private sector investment (Opportunity cost)
Why does the government sometimes intervene with prices?
How can they intervene? (2)
Government may intervene and regulate prices to address market failure.
Maximum/Minimum prices
What does a minimum price look like on a diagram?
Horizontal line above free-market equilibrium price
What does a maximum price look like on a diagram?
Horizontal line below the free-market equilibrium price.
Give a real life example of when maximum prices are used?
Rent caps
How could maximum prices lead to government failure?
The max price could lead to excess demand
What is another way the government could intervene that is not price control?
Regulation
Define prohibition
An attempt to prevent the consumption of a demerit goods by declaring it illegal
How can regulations cause government failure?
- Excessive administration costs
- Unintended consequences (black markets)
What are the four causes of government failure?
- Distortion of price signals
- Unintended consequences
- Excessive administrative costs
- Information gaps
How are information gaps a cause of government failure when the government set taxes?
They might lack the information to set them at the right rate, so they might over or under tax.
How are excessive administrative costs a cause of government failure?
If the cost of implementing the government interventions exceeds the benefits of it, then it is government failure.
What are the 7 types of government intervention you need to know?
- Indirect taxes (ad valorem and specific)
- Subsidies
- Maximum/minimum prices
- Trade pollution permits
- State provision of public goods
- Provision of information
- Regulation
What are some disadvantages of subsidies? (3)
- Firms become too reliant on subsidies
- Might not be set at the right level
- Cost to government
What are some disadvantages of indirect taxes?
- If demand is price inelastic, taxes won't effect demand too much - Setting tax at right level - Regressive - Black markets
