1.4 government intervention Flashcards
why do governments intervene?
to reduce market failure to:
- reduce negative externalities
- encourage positive externalities
- increase production of merit goods and decrease demerit good supply
- supply public goods that wouldn’t be supplied by private sector
congestion charge def
a payment required to enter a densely crowded area of high traffic
pros and cons of congestion charge
pro:
- encourages alternative use of transport such as public transport
- unavoidable and high price charged
cons:
- regressive
- expensive and difficult to monitor
example of congestion charges with effect
ULEZ: ultra low emissions zone
london area - fare of £12.50 per day for diesel and petrol vehicles not meeting Euro VI and IV standards, £100 for trucks
effect: 3 years, 180 tonnes of particulates decrease
London congestion charge £15
policies to encourage positive externalities
Grants
Regulation
Advertising
Maximum price
Education
Subsidies
policies to discourage negative externalities
Taxation
Regulation
Advertising
Min price
Pollution permits
Fines
Congestion charges
eval to governments intervening when there is market failure
- difficult to give quantitative value to externalities so hard to assign a monetary value
- time lags and money needed - burden on government’s resources
judgement: any non perfect compeititve market will fail in some way, just depends how
maximum price explanation
price ceiling - max price set below equilibrium price
price is lowered so leads to shortage as demand rises
deadweight loss shown by triangle on graph
consumer surplus increases, producer surplus decreases
unintended consequences of max price
black market
massive shortages - drive prices up in rationing fucntion of price mechanism
justified max price situations
monopolies, exploitation of necessity products, volatile prices in agriculture or equivalent
eval for max prices
depends on elasticity of goods, alternative policies
example of maximum prices IRL
- ofgem energy price guarantee - formerly called energy price cap - currently £1690/year for households consuming noremal rates
issues: discourages investment that needs energy such as in exploration and energy generation
discourages small firms from growing - Bulb energy - tuition fees fixed at £9000/yrear - but have lots of debt so could be brought down to £6000
minimum price
pricefloor - min price charged above equlibrium meant to discourage consumption of specific g/s
impacts: surplus
consumer surplus decreases more than producer surplus increasing, deadweight loss
issues with a minimum price
- due to rationing mechanism prices can just fall if QD falls
- wasted resources due to disequlilbrium
- allocative inefficiency - distorted market
- black markets selling product for cheaper
- regressive policy
eval of max/min prices as a whole
- elasticity and nature of good: is it demerit?
- ev the size of the policy - how much more than equlilbrium is the min/max?
- how many people will it affect?
demerit good vs negative externality
demerit goo: cost to consumer in future
negative externality: cost tp society today
examples of min price
-min price of labour: national minimum wage/national living wage
currently - above 23 years old is £10.42/hr
- min price set on alcohol in scotland - 65p per unit
problems with setting and fixing a price - such as rent
shortage
quality may decrease which can lead to side effects - such as if theres a damp property, growth of mold which means worse health
european trade scheme - TPPs
- covers 45% of greenhouse gas emissions in the EU
- stage 3: carbon leakage list made, countries likely to relocate because of low permits granted more permits (2017-18)
- stage 4: 2020-2030 - take into account brexit, increase cap every year this year to 4.2% from 2.2%, public naming and fines of £100/tonne
- new funds: investment fund and modernisation fund
- tradeable - firms are profict maximisers cet par so by selling permits they gain profict and better for the environemtn
- despite this - EU not on track to meet net zero by 2050
buffer stock schemes
government keeping price between bounds by selling and buying stock depending on the time of cycle
government failure def
government intervention leading to a net welfare loss in comparison to the free market operating alone
ways govt failure happens:
- Policy myopia - focus only on one thing and not on its effects
- distortion of price signals - when the governemnt itnervenes and tries to influence behaviours and prices, inefficiencies can be created
- excessive adminstrative costs - costs needed for intervention - if they exceed benefits it is bad
- information gaps - poor research or because governments cannot predict the future they can get things wrong
example fo goevrnment failure
- drugs ban = black market
- 5p per plastic bag causing firms to fail
