1.4. Government Intervention Flashcards
Goverment Failure
When costs of intervention outweigh the benefits of intervention.
The end result is a worsening of allocation of scarce resources harming social welfare.
4 Ways Of Goverment Failure
Information Failure - valuing externalities
Regulatory Capture - regulating monopoly power
Unintended Consequences - black market , impact on poor , impact on firms , employment
Admin & Enforcement Cost Very High - regulations , subsidies , price control
Indirect Tax & How Market Failure Occurs
Indirect tax increases a firms cost of production but can be transfered to customers via higher prices.
Increases cost of production
Internalises externality ( Polluter Pays )
Solves Overconsumption / Production
Promotes allocative efficiency whilst genarating gov. income
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1. Price Inelastic Demand
2. Setting Tax At Right Leval
3. Regressive
4. Black Markets
Internalises externality ( Polluter Pays )
what does it mean?
Polluter Pays ( Internalizing an externality ) means making sure the cost or benefit of an action that affects others is accounted for by the person or organization doing it.
Subsidy & How Market Failure Occurs
Money grant given to producers by the goverment to lower cost of production and encourage an increase in output
Lowers cost of production
↓ Price and ↑ quantity
Solves underconsumption / production
Allocative efficiency , welfare gain
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1. Cost
2. Setting subsidy at the right level
3. How will firms use subsidy
4. Price Inelastic Demand
Regulation & Market Failure
Rule / Law enacted by the goverment that must be followed by economic agents to encourage a change in behaviour.
- Non Market Based Approach
- Incentive to change behaviour
- Solve issues in free market
- Allocate efficiency & welfare gain
Command
i) Bants ii) Limits iii) Caps iv) Compulsory v) Inovative Regulations
Control
i) Enforceemnt ii) Punishment
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1. Cost
2. Setting the right regulations
3. Black markets & Unintended Consequences
4. Equity
Tradable Pollution Permits
i) Cap Set at Q٭ ii) Permits issued to match cap. iii) Firms make decisions based on least cost. iv) Enforcement.
v.) Pollution ↓ to social optimum allocative efficiency
v1.) Profit.
v2.) Not burdened when permit Price Rise.
→ Invest in green tech.
→ Buy spare permits
Externality internalised // Polluter Pays in most efficient way
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1. Enforcement.
2. Imperfect info for Gov.
3. Unintended Consequences
4. Need for international coorperation
State Provision
Direct provision of goods / services by the goverment free at the point of consumption.
- Goverment Consideres full SC / SB allocating resources at Q٭
- Free at point of consumption
- Solve UC / UP and inequity issues
- Solve missing market issues
- Allocative Efficiency & Welfare Max
𝐁𝐔𝐓
1. Excess Demand.
2. Cost.
3. Imperfect Info.
4. Inefficiency Of State Organisations
Property Rights and Market Failure
Property rights refer to the legal ownership and control over resources, goods, or services, allowing the owner to decide how they are used.
Connection to Market Failure:
Market Failure occurs when resources are inefficiently allocated.
Lack of Property Rights:
- Leads to overuse or depletion of resources.
- Example = Deforestation, overfishing, pollution
How Lack of Property Rights Leads to Market Failure:
No Ownership → Overuse ( People exploit shared resources without responsibility )
External Costs ( Pollution or depletion harms society
(e.g. deforestation )
Outcome: Market Failure ( Inefficiency in resource allocation )
No property rights → Overuse of resources → External costs → Market failure
The Free Market and Market Forces
PROS / CONS
Free Market = Any place where buyers meet sellers to exchange good and services free from goverment intervention
Equilibrium Q* is allocative efficiency
i) Resources perfectly follow consumer demand
ii) Society surplus is maximised
iii) Net social benifit is maximised
PROS:
- Allocative Efficiency
- Encourage competition
- Dynamic competition
- Dynamic efficiancy 🠮 investment
- Job creation and economic growth
- Freedom, Liberty & Choice
- No Risk Of Goverment Failure
CONS:
- Markets can fail
- inequity given inequality
- Excessive profiteering
- Creative Destruction
- Prive Volatility
Specialisation
PROS / CONS
Specialisation ➙ the concentration of production on a narrow range of goods / services
PROS:
- Higher Output ➙ ↑ Trade, ↑ Growth
- Wider ranges of Goods / Services
- Greater allocative efficiency
- Higher productivity through better use of workers
- Quality Improvements
CONS:
- Finite Resources
- Changes in Fashion / Taste
- De - Industialisation
- Nationsl Interpendance
Division of Labour
PROS / CONS
Division of Labour ➙ Breaking down the production process tinto separate task upon specialisation
PROS:
- Workers highly productive
- Specialist capital for workers
- Lower prices, Higher quantity / choice and quality for consumers
CONS:
- Demotivation of workers
- Higher worker turnover
- Risk of long term unemployment
- Highly Standardised Goods / Services
PED < 1
PES < 1
Regular Demand & Supply Shifts
PED < 1 :
- Nesessities
- Lack of good Substitutes
PES < 1 :
- Large production lag
- Hard to store = Low stock
Regular Demand & Supply Shifts :
- Weather ( Supply )
- Macro Performance ( Demand )
Natural Science
Social Science
Demand theory
Natural Science 🠮 Science observe aspects of the universe
Social Science 🠮 Observation of human behavior
Demand theory:
1. Observe Consumer Behavior
2. Fortm hypothesis of how consumers spend
3. Make predictions from hypotheiss
4. Use evedence to test predictions
