1.4 (government intervention)

Question 1

define tradable pollution permits

Answer 1

Permits which allow firms to pollute up to a certain limit. These permits can then be traded between firms.

E.g. Europe’s Emissions Trading Scheme (ETS). The EU government set a cap of 2bn tonnes of CO2, and issued permits to firms. It held the last 10% of permits back for auction.

Question 2

what types of policies does the government use to address market failure?

Answer 2

Taxes, subsidies, tradable pollution permits, minimum and maximum prices, regulation and information provision.

Question 3

what are the 4 causes of government failure?

Answer 3

1. The distortion of the price mechanism
2. The law of unintended consequences
3. Administration costs
4. Information gaps

Question 4

define government failure

Answer 4

Government failure is when the government intervenes to correct a market failure but makes the allocation of resources even worse than before.

Question 5

define distortion of the price mechanism

Answer 5

When government intervention, like price controls (maximum and minimum price), disrupts the natural balance of supply and demand, causing inefficiencies such as shortages or surpluses.

Question 6

define the law of unintended consequences?

Answer 6

Government intervention can have negative unintended consequences.

Question 7

define Administration costs

Answer 7

The miscellaneous costs of government intervention.
E.g. paperwork, legal fees, secretaries, managers.

Miscellaneous: A group consisting of various items or elements that do not fit into a single category or are of different types.
synonyms: various, diverse, mixed, or assorted.

Question 8

define Information gaps

Answer 8

When the government lacks the information needed to intervene most efficiently.

E.g. the government doesn’t know what size to set for its carbon tax.