1.4 Government Intervention

Question 1

What is a minimum price and why is it used

Answer 1

A price set by the government below which the price is not allowed to fall
Used to raise the price of a negative externality

Question 2

Draw a minimum price on a supply and demand diagram

Answer 2

PowerPoint

Question 3

Give two disadvantages of minimum prices

Answer 3

Government may set price too low so that it has little or no impact
Some producers would be happy to sell below the minimum price - potential black market

Question 4

What happens to consumer and producer surplus when a minimum price is introduced

Answer 4

Consumer Surplus - Decreases
Producer Surplus - Increases

Question 5

What is a maximum price and why is it used

Answer 5

A price set by the government above which the price is not allowed to rise
Used to reduce the price of positive externalities

Question 6

Draw a maximum price on a supply and demand diagram

Answer 6

PowerPoint

Question 7

Give two disadvantages of maximum prices

Answer 7

Some consumers may be prepared to pay above the maximum price to get what they want - potential black market
A maximum price will create a shortage and disequilibrium will have to be maintained

Question 8

What happens to producer and consumer surplus when a maximum price is introduced

Answer 8

Consumer Surplus - Increases
Producer Surplus - Decreases

Question 9

What is the purpose of pollution permits

Answer 9

An alternative way of reducing pollution in the production of goods

Question 10

How do pollution permits work

Answer 10

A fixed number of permits are allocated to polluting factories, permits can be traded between factories. Factories which can reduce pollution for less than the price of a permit can sell spare ones to generate a profit. Factories which find it difficult to reduce pollution can buy extra permits. Gradually the supply of permits is reduced and the price increases

Question 11

Give two advantages of pollution permits

Answer 11

Cost of running this system are less than when an industry subject to direct regulation
Can create an incentive for firms to invest in green technology

Question 12

Give two disadvantages of pollution permits

Answer 12

Large fluctuations in the price of pollution permits creates uncertainty for firms whether it is worth investing in green technology
Too few permits may increase production costs for firms as permits are more expensive

Question 13

What is state provision of public goods

Answer 13

Where the government can allocate the correct amount of resources to a good and provide the good or service directly

Question 14

Give two examples of state provided public goods

Answer 14

Street Lighting
Roads

Question 15

Give two advantages of state provision

Answer 15

Government can provide the exact level deemed optimal by society
Government provision means they can ensure all people have access

Question 16

Give two disadvantages of state provision

Answer 16

Government provision may be inefficient as government run organisations are not profit maximisers, so lack 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 - eg too many resources committed to defence than hospital beds

Question 17

What is provision of information

Answer 17

Where the government provides information about a good where the is a lack of information or the information is asymmetric

Question 18

Give one advantage of the provision of information

Answer 18

Over time this may lead to more significant changes to society’s habits rather than simply raising the price through taxes

Question 19

Give two disadvantages of the provision of information

Answer 19

Awareness campaigns can be ignored
May not have much impact in the short run - significant time lags between conducting campaigns and seeing benefits

Question 20

What is regulation

Answer 20

Setting rules and requirements that must be followed by business’ in particular industries

Question 21

What are the different ways a government can regulate

Answer 21

Pollution Permits
Maximum Prices
Minimum Prices
Provision Of Information
Banning Production Of Goods Entirely

Question 22

Give two advantages of regulation

Answer 22

Relatively cheap process to run and enforce
Relatively easy to make consumers and producers be aware and understand requirements

Question 23

Give two disadvantages of regulation

Answer 23

Finding the right level of intervention can be difficult
If the government does not back up regulation with sanctions people may ignore it

Question 24

What is government failure

Answer 24

Government intervention that leads to a net welfare loss

Question 25

What are the 4 causes of government failure

Answer 25

Information gaps
Unintended consequences
Administration costs
Distortion of price signals

Question 26

Explain how Information gaps may lead to government failure

Answer 26

If government officials lack the required information they may struggle to make proper informed decisions

Question 27

Explain how administration costs may lead to government failure

Answer 27

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

Question 28

Explain how unintended consequences may lead to government failure

Answer 28

Individuals in society can be unpredictable and may respond to policies in a way that is unexpected, these consequences can be positive or negative

Question 29

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

Answer 29

Some government policies distort the prices that would otherwise be created by the market eg minimum prices may raise incomes but lead to lowest paid being laid off which was who the gov was trying to protect