1.4 government intervention

Question 1

why do governments intervene?

Answer 1

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

Question 2

congestion charge def

Answer 2

a payment required to enter a densely crowded area of high traffic

Question 3

pros and cons of congestion charge

Answer 3

pro:
- encourages alternative use of transport such as public transport
- unavoidable and high price charged
cons:
- regressive
- expensive and difficult to monitor

Question 4

example of congestion charges with effect

Answer 4

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

Question 5

policies to encourage positive externalities

Answer 5

Grants
Regulation
Advertising
Maximum price
Education
Subsidies

Question 6

policies to discourage negative externalities

Answer 6

Taxation
Regulation
Advertising
Min price
Pollution permits
Fines
Congestion charges

Question 7

eval to governments intervening when there is market failure

Answer 7

• 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

Question 8

maximum price explanation

Answer 8

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

Question 9

unintended consequences of max price

Answer 9

black market
massive shortages - drive prices up in rationing fucntion of price mechanism

Question 10

justified max price situations

Answer 10

monopolies, exploitation of necessity products, volatile prices in agriculture or equivalent

Question 11

eval for max prices

Answer 11

depends on elasticity of goods, alternative policies

Question 12

example of maximum prices IRL

Answer 12

• 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

Question 13

minimum price

Answer 13

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

Question 14

issues with a minimum price

Answer 14

• 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

Question 15

eval of max/min prices as a whole

Answer 15

• 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?

Question 16

demerit good vs negative externality

Answer 16

demerit goo: cost to consumer in future
negative externality: cost tp society today

Question 17

examples of min price

Answer 17

-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

Question 18

problems with setting and fixing a price - such as rent

Answer 18

shortage
quality may decrease which can lead to side effects - such as if theres a damp property, growth of mold which means worse health

Question 19

european trade scheme - TPPs

Answer 19

• 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

Question 20

buffer stock schemes

Answer 20

government keeping price between bounds by selling and buying stock depending on the time of cycle

Question 21

government failure def

Answer 21

government intervention leading to a net welfare loss in comparison to the free market operating alone

Question 22

ways govt failure happens:

Answer 22

• 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

Question 23

example fo goevrnment failure

Answer 23

• drugs ban = black market
• 5p per plastic bag causing firms to fail