1.4 Government Intervention Flashcards
What is a minimum price and why is it used
A price set by the government below which the price is not allowed to fall
Used to raise the price of a negative externality
Draw a minimum price on a supply and demand diagram
PowerPoint
Give two disadvantages of minimum prices
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
What happens to consumer and producer surplus when a minimum price is introduced
Consumer Surplus - Decreases
Producer Surplus - Increases
What is a maximum price and why is it used
A price set by the government above which the price is not allowed to rise
Used to reduce the price of positive externalities
Draw a maximum price on a supply and demand diagram
PowerPoint
Give two disadvantages of maximum prices
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
What happens to producer and consumer surplus when a maximum price is introduced
Consumer Surplus - Increases
Producer Surplus - Decreases
What is the purpose of pollution permits
An alternative way of reducing pollution in the production of goods
How do pollution permits work
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
Give two advantages of pollution permits
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
Give two disadvantages of pollution permits
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
What is state provision of public goods
Where the government can allocate the correct amount of resources to a good and provide the good or service directly
Give two examples of state provided public goods
Street Lighting
Roads
Give two advantages of state provision
Government can provide the exact level deemed optimal by society
Government provision means they can ensure all people have access
Give two disadvantages of state provision
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
What is provision of information
Where the government provides information about a good where the is a lack of information or the information is asymmetric
Give one advantage of the provision of information
Over time this may lead to more significant changes to society’s habits rather than simply raising the price through taxes
Give two disadvantages of the provision of information
Awareness campaigns can be ignored
May not have much impact in the short run - significant time lags between conducting campaigns and seeing benefits
What is regulation
Setting rules and requirements that must be followed by business’ in particular industries
What are the different ways a government can regulate
Pollution Permits
Maximum Prices
Minimum Prices
Provision Of Information
Banning Production Of Goods Entirely
Give two advantages of regulation
Relatively cheap process to run and enforce
Relatively easy to make consumers and producers be aware and understand requirements
Give two disadvantages of regulation
Finding the right level of intervention can be difficult
If the government does not back up regulation with sanctions people may ignore it
What is government failure
Government intervention that leads to a net welfare loss
What are the 4 causes of government failure
Information gaps
Unintended consequences
Administration costs
Distortion of price signals
Explain how Information gaps may lead to government failure
If government officials lack the required information they may struggle to make proper informed decisions
Explain how administration costs may lead to government failure
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
Explain how unintended consequences may lead to government failure
Individuals in society can be unpredictable and may respond to policies in a way that is unexpected, these consequences can be positive or negative
Explain how the distortion of price signals may lead to government failure
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
