1.4 Government Intervention

Question 1

what is government intervention

Answer 1

taking negative externalities of production

Question 2

what does a graph on government intervention by taxing look like

Answer 2

Question 3

evaluation of government intervention by taxing

Answer 3

• depends on the PED of the good
• inelastic = tax burden passed to consumer but continued demand
• producers will still supply as much and overproduction isn’t solved

Question 4

define information campaign and the aims

Answer 4

when the government provides information to the consumer to fill any information gaps so that the consumer can make rational decisions about their demand

Question 5

what is regulation used on

Answer 5

businesses

Question 6

what is legislation used on

Answer 6

people

Question 7

what is pollution abatement

Answer 7

taking measures to reduce pollution

Question 8

what are pollution permits

Answer 8

giving firms a legal right to pollute a certain amount that they won’t be charged for in taxation for pollution

Question 9

describe a graph on demand and supply of pollution permits

Answer 9

Question 10

advantages of pollution permits

Answer 10

• pollution is abated where the cost to do so is lowest
• policy makers can be more certain of the overall levels of pollution
• initially, permits for free so less of an immediate impact on CoP
• dynamic

Question 11

disadvantages of pollution permits

Answer 11

• unpopular with businesses as extra cost - decrease in jobs
• monopoly - small firms close = lost competition
• costs to businesses is uncertain = hard to plan + invest
• initial allocation is hard
• schemes are complex + need monitoring

Question 12

name the 9 types of government failure

Answer 12

1. moral hazard
2. political self-interest
3. poor value for money
4. policy myopia
5. regulatory capture
6. conflicting objectives
7. red tape and bureaucracy
8. unintended consequences
9. distortion of price signals

Question 13

define government failure

Answer 13

a policy intervention leads to a worsening of market failure. the intervention causes further inefficiencies and welfare loss

Question 14

what is government failure by moral hazard

Answer 14

a situation where a party lacks the incentive to guard against a financial risk due to being protected from any potential consequences

Question 15

what is government failure by political self-interest

Answer 15

when government policy interventions are based on popularity in re-elections rather than an overall outcome

Question 16

what is government failure by poor value for money

Answer 16

large opportunity costs because government spends money with a little rate of return

Question 17

what is government failure by policy myopia

Answer 17

when government policy interventions seek to address short-term issues rather than longer-term solutions

Question 18

what is government failure by regulatory capture

Answer 18

those bodies regulating industries become sympathetic to the businesses they are supposed to be regulating. regulatory capture can mean monopolies can continue to charge high prices

Question 19

what is government failure by conflicting objectives

Answer 19

when the government does not focus on one objective because it conflicts with another objective

Question 20

what is government failure by red tape and bureaucracy

Answer 20

more regulation results in lower productivity

Question 21

what is government failure by unintended consequences

Answer 21

when the government makes a policy to solve a problem but end up making the problem worse

Question 22

what is government failure by distortion of price signals

Answer 22

the free-market equilibrium is disturbed resulting in overconsumption and underproduction