1.4 - government intervention

Question 1

What are 2 advantages of subsidies?

Answer 1

• Incentivises an increase in consumption
• Might help reduce inequality

Question 2

What are 2 disadvantages of subsidies?

Answer 2

• Cost to the taxpayer
• Ineffective if demand is inelastic

Question 3

What is one advantage and one disadvantage of indirect taxes?

Answer 3

Advantage: source of revenue for the government.
Disadvantage: ineffective if demand is inelastic.

Question 4

What are 2 advantages of maximum prices?

Answer 4

• Allows consumers on a low income to be able to afford goods (reduces exploitation)
• Helps prevent inflation

Question 5

What are 2 disadvantages of maximum prices?

Answer 5

• Consumers will be unable to find supplies of the product due to shortages, leading to black markets.
• Producers may leave the market because it isn’t profitable, causing more shortages

Question 6

What are 2 advantages of minimum prices?

Answer 6

• Producers can plan investment and output so are incentivised to supply enough
• Deters consumption of demerit goods

Question 7

What are 2 disadvantages of minimum prices?

Answer 7

• Encourages overproduction, leading to surpluses and an inefficient allocation of resources.
• Government has to buy surpluses (opportunity cost, could be spent elsewhere) and taxpayers have to pay cost of storage.

Question 8

What are tradeable pollution permits?

Answer 8

Permits issued by the government that allow firms to pollute up to a certain limit. They can be traded between firms so that ‘clean’ firms can sell their surplus permits to more polluting firms.

Question 9

What is one advantage and one disadvantage of state provision of public goods?

Answer 9

Advantage: ensures the product/service is provided.
Disadvantage: politicians decide the amount of resources allocated to these public goods without reference to consumers.

Question 10

What are 2 advantages of government regulation?

Answer 10

• Can limit negative externalities
• Incentivises producers to develop tech that reduces pollution

Question 11

What are 2 disadvantages of government regulation?

Answer 11

• Limits consumer sovereignty
• Hard to determine the socially optimum level

Question 12

When does government failure happen?

Answer 12

When government intervention to correct market failure causes even greater market failure by moving consumption and output further away from the socially optimum level.

Question 13

What are 4 causes of government failure?

Answer 13

1) Information failure - politicians don’t have adequate information to make a policy.
2) Unintended consequences - if a policy isn’t fully thought out.
3) High admin/enforcement costs - regulation, subsidies etc. carry high costs.
4) Distortion of price signals - price manipulation undermines the price mechanism leading to inefficient allocation of resources.

Question 14

What is a problem regarding implementing indirect tax, subsidies, and max/min prices?

Answer 14

It’s hard to set the right price because quantifying the external costs/benefits are difficult.

Question 15

What are 3 disadvantages with tradable pollution permits?

Answer 15

• Large efficient firms will buy up the permits and continue to pollute.
• Need to be internationally enforced.
• Might make a country’s goods less internationally competitive.