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Economics > 1.4. Government intervention > Flashcards

1.4. Government intervention Flashcards

1
Q

What is government intervention?

A

Government intervention in markets is when the state actively sets rules, regulations or introduces measures to change the workings of the free market economy

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2
Q

What are the advantages of indirect tax as a type of government intervention?

A
  • Decreases supply of demerit goods (higher COP) -> reduces incentive to produce
  • Raises gov revenue which could be used to solve the externality in other ways (e.g. education)
  • Internalises the externality -> the market now produces at social equilibrium position and social welfare is maximised
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3
Q

What are the disadvantages of indirect tax as a type of government intervention?

A
  • Emergence of black markets (could already exist)
  • Inelastic demand -> tax will be ineffective at reducing output
  • Regressive policy -> the poor spend a larger proportion of their income than the rich do
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4
Q

What are the advantages of subsidies as a type of government intervention?

A
  • Society reaches social optimum and welfare is maximised
  • Might attract other firms into the market
  • Reduced demand for demrit goods, increased demand for merit goods
  • Reduced COP -> increased global compeptiveness of firms - encoruages exports
  • Increased incentive to produce -> more consumption of merit goods
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5
Q

What are the disadvantages of subsidies as a type of government intervention?

A
  • Gov has to spend a large amount of money -> high opportunity cost
  • May encourage laziness from producers because they do not need to be as efficient
  • Elasticity of demand
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6
Q

What is a minimum price?

A

A legally imposed price floor set by government regulation which prevents prices from falling below a certain level

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7
Q

What are the advantages of minimum price as a type of government intervention?

A
  • Decreased consumption of demerit goods
  • Protects the stability of producers’ income -> more investment in agriculture
  • Tax revenue rises as business profits rise
  • Gov will own large stocks of food -> gives nation food security
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8
Q

What are the disadvantages of minimum price as a type of government intervention?

A
  • Elastic PED -> will harm businesses
  • Emergence of black markets
  • Opportunity cost
  • Distorts price signals -> excess supply
  • Waste of perishable resources
  • Lower demand for domestically produced goods
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9
Q

What is a maximum price?

A

When the government sets a legal limit on the price of a good or service - also known as a price ceiling - with the aim of reducing prices below the market equilibrium

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10
Q

What are the advantages of maximum price as a type of government intervention?

A
  • It makes socially important goods more available
  • Reduces price volatility
  • Prevents price exploitation from producers
  • Increases consumer surplus
  • Reduces power of monopolies
  • Increased consumption of merit goods (lower price)
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11
Q

What are the disadvantages of maximum prices as a type of government intervention?

A
  • Reduces incentive to produce
  • Leads to an imbalance in the market -> excess demand
  • Decreased price competitiveness
  • Emergence of black markets -> costly for society due to increase in criminal activity - cost to government
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12
Q

What are tradable pollution permits?

A
  • Regulated allowances that allow producers to generate pollution
  • If pollution over the permitted allowance is created, a fine will occur
  • If firms find they produce less pollution than allotted, they can sell the excess permits to another firm for money
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13
Q

What are the advantages of tradable pollution permits as a type of government intervention?

A
  • Government can raise revenue by selling permits and fining firms who exceed their pollution limit -> can be used to clean up environment so negative externality is internalised
  • Encourages firms to lower pollution levels - more benefit
  • Encourages firms to use and invest in green technology
  • Maximises social welfare
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14
Q

What are the disadvantages of tradable pollution permits as a type of government intervention?

A
  • Complex system to implement
  • Expensive to monitor and police
  • Firms can outsource production
  • If firms are large, making huge profits, they won’t care about the fines (monopoly)
  • All countries must use it for it to be effective
  • Firms can manipulate their emissions data - difficult to quantify
  • Firms may find it profitable to just pay the costs
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15
Q

What are the advantages of state provision of public goods as a type of government intervention?

A
  • Corrects market failure by providing important goods that otherwise would not be provided (non-profitable) -> improved social welfare
  • Reduced inequality by redistributing money from wealthy to poor
  • Can help bring about equality -> ensures everyone has access to basic goods
  • There will be the benefits of the goods themselves, e.g. providing healthcare ensures workforce is healthy
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16
Q

What are the disadvantages of state provision of public goods as a type of government intervention?

A
  • Expensive & high opportunity cost for government - administrative costs are a problem
  • The gov may be inefficient at production as they have no incentive to cut costs -> the economic incentives for efficiency could be eroded
  • Gov officials may suffer from corrupt officials or conflicting objectives
  • With asymmetric information, there is a risk of government failure
17
Q

What are the advantages of provision of information as a type of government intervention?

A
  • Helps consumers act rationally which allows the markets to work properly
  • Decreased consumption of demerit goods
18
Q

What are the disadvantages of provision of information as a type of government intervention

A
  • Expensive for gov -> incurs opportunity cost
  • Consumers may not listen to the information provided due to irrational behaviour
  • The gov themselves may not always have all the information -> difficult to inform consumers
19
Q

What is regulation as a type of government intervention?

A

Governments can impose laws and caps to ensure that levels are set where MSB=MSC or to ensure companies provide full information on products

20
Q

What are the advantages of regulation as a type of government intervention?

A
  • Can correct market failures that arise from externalities
  • Can control monopolies and stop them from taking advantage of customers and reducing welfare
  • Legislation provides a means of punishing firms for their anti-competitive behaviour
  • Regulation can be used to protect the environment
21
Q

What are the disadvantages of regulation as a type of government intervention?

A
  • Laws may be expensive for government to monitor -> incur opportunity cost
  • Firm may pass on costs in the form of higher prices (expensive to follow)
  • Excessive regulation may reduce competition in a market & efficiency -> increasing bureaucracy & reducing innovation
22
Q

What is government failure?

A

Government failure happens when government intervention leads to a net welfare loss

23
Q

What are the 4 main causes of government failure?

A
  • Unintended consequences
  • Distortion of price signals
  • Excessive administrative costs
  • Information gaps
24
Q

What are unintended consequences as a cause of government failure?

A
  • Some interventions cause effects that the government didn’t intend to happen
  • Consumers and producers may react to new policies in unexpected ways and so the policy doesn’t have the effect it should
25
Q

What is distortions of price signals as a cause of government failure?

A
  • Some types of government intervention change price signals in the market & distort the free market mechanism
  • Keep some companies in business when they are inefficient so the resources should be switched to elsewhere or consumers pay too much for a good
  • E.g. max/min prices lead to excess demand/supply, making it difficult to allocate resources
26
Q

What are excessive administrative costs as a cause of government failure?

A
  • A lot of money allocated to the gov is used on basic admin costs
  • Social costs > social benefits once admin costs are taken into account -> intervention may not be worthwhile
27
Q

What are information gaps as a cause of government failure?

A
  • Asymmetric information limits the governments’ ability to critically assess market failures and possible solutions
  • The right decision isn’t always made and government failures may arise
28
Q

Minimum price - real world example

A

EU Common agricultural policy

29
Q

Maximum price - real world example

A

Rent controls in New York

Economics (32 decks)

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