1.4 Government intervention Flashcards
How does indirect taxes fix market failure
Indirect tax = increases costs for producers → production becomes more expensive and private costs increase → reduces incentives for producers to supply more of the good or service → ensures the market is working at the socially efficient equilibrium → internalises the negative externality.
How does specific taxes fix market failure
Specific tax = a fixed amount of tax placed on a particular good -> increases c.o.p -> shifts supply curve inwards as producers require higher prices to makeup for tax -> leads to an increase in the price paid by consumers (higher equilibrium price) and a decrease in the quantity demanded (lower equilibrium quantity)
How do subsides fix market failure
Subsidies = reduces the cost of production or consumption -> increases the incentive to supply more of the good or service -> subsidy reduces the price of the good for consumers increasing demand -> : The subsidy helps the market reach the social optimum, where the quantity produced and consumed is higher -> reduces welfare loss
How do maximum price fix market failure
Maximum price = can’t sell product for above the price legally -> i.e merit goods = price is set below market equilibrium so people can afford to buy them -> demand for them goes up
How do minimum price fix market failure
Minimum price = suppliers cannot sell the product legally at a lower price -> is set above the normal free market equilibrium -> reduces demand for the good
What are trade pollution permits
A limited number of permits given to firms that can be bought and sold allowing them to emit a certain amount of pollution.
How do trade pollution permits fix market failure
Incentivizes firms to reduce pollution to firstly prevent themselves from buying more permits but also allows firms can sell their excess permits for revenue
How does the state reinforce the provision of public goods
- Nationalisation
- Subsidies
- Direct Provision (Government Produces the Good Itself)
- Taxation & Funding (The government pays for the good)
How does the state fix information asymmetry
The government mandates accurate and transparent information reducing information asymmetry -> consumers can compare products and make better purchasing choices -> reduces welfare loss and enhances social welfare
How do regulations by the government fix market failure
Regulation = rule/law enacted by government that must be followed by economic agent to encourage a change in behaviour -> places bans/limits/ caps -> reduce the production or consumption of goods causing market failure
What is government failure
Government failure is when the government intervenes to correct a market failure but makes the allocation of resources even worse than before./
What are the four causes of government failure
- Distortion of price signals
- Unintended consequences
- Excessive administrative costs
- Information gaps
How does a distortion of price signals cause market failure (maximum price)
Price controls = artificially alters market prices as prices are placed below market equilibrium → prices no longer reflect true supply and demand for g/s → lower prices discourage producers from supplying while increasing consumer demand. This leads to shortages and a misallocation of resources, making the market inefficient and deviating from equilibrium.”
How does a distortion of price signals cause market failure (minimum price)
Price controls = artificially alters market prices → prices no longer reflect true supply and demand for g/s → producers incentivised to overproduce → consumers demand less, creating a surplus. This surplus leads to inefficient resource allocation, as goods go unsold and the market deviates from equilibrium.
How does unintended consequences reflect market failure
Government policies create unexpected problems (For example, subsidies can lead to waste through surpluses or overconsumption, while taxes may encourage black markets) -> Results in resource misallocation -> policies either worsen the original issue or create new inefficiencies
How does excessive administrative costs show government failure
Excessive administrative costs = policies are costly to run → too much money is spent on paperwork and management → less funding is available to fix the actual problem → policies become less effective → government wastes resources and causes inefficiency
How does information gaps show government failure
Information gaps = Information gaps occur when the government lacks full or accurate data -> leads to policies based on incomplete or incorrect information -> Result in poor decision-making by consumers (adverse selection), as described by Friedrich Hayek, causing resource misallocation
