1.4 Government intervention

Question 1

merit goods

What are merit goods?

Answer 1

Goods the government thinks are underconsumed & ought to be subsidised/ provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or seervice.

Question 2

merit goods

What type of market failure is associated with merit goods?

Answer 2

1. underprovision of merit goods - due to profut incentive & uncertainty in sales
2. underconsumption of merit goods - due to high prices & lack of information of benefit of merit good.

Question 3

merit goods

What is the intended objective of government intervention with merit goods?

Answer 3

1. to support producers
2. to support consumers

Question 4

merit goods

What criteria does the government have to meet to intervene with merit goods?

Answer 4

1. important market
2. low opportunity cost
3. sufficient market information
4. appropriate form of intervention to minimise risk of government failure

Question 5

merit good

What are the methods of intervention the government uses when adressing market failure from merit goods?

Answer 5

1. subsidies
2. maximum price scheme

Question 6

merit goods - subsidy

What is a subsidy?

Answer 6

A government grant that is allocated to firms in order to increase the provision of merit foods/ help struggling firms remain in markets. Used to increase supply.

shown as a rightwards shift of supply in an AD/AS graph

Question 7

merit goods - subsidy

How do subsidies help?

Answer 7

It increases supply & allows firms to sell at a lower price and higher quality. Increase in affordability & welfate for producers & consumers.
This inceases the provision of merit goods so cheaper/ less healthy alternatives that generate negative externalities arent used as often.

Question 8

merit goods - subsidy

What are some criticisms of using subsidies as a method of government intervention?

Answer 8

1. opportunity cost - can result with other industries being neglected/ have funding cuts
2. **misuse/ moral hazard **- firm may take more risks & misuse the funds for their own financial gains - irresponsibility, the cost of failure falls on the gov. - the gov. may not know how the subsidy is being spent
3. over reliance - may become too reliant on gov. & not try hard enough to reduce costs & increase efficiency - loss of incentive
4. classical school of thought - Adam Smith advocated the case for free market provision & opposed gov. failure as he believed that the ‘invisible hand’ would internalise any externalities with changes in market forces.

Question 9

merit goods - maximum price scheme

What is a maximum price scheme?

Answer 9

A form of gov. intervention that sets a price ceiling below the equilibrium price in order to reduce the prices & increase affordability of merit goods.

Question 10

merit goods - maximum price scheme

What is the intended objective of a maximim price scheme?

Answer 10

to reduce the market failure associated with the** underconsumption of merit goods**.

Question 11

merit goods - maximum price scheme

What are some criticisms of using a maximum price scheme as a method of government intervention?

Answer 11

1. shortage - disequilibrium is created & Qd >Qs
2. disincentive - limits profits for firms - will also compromise on quality
   3.** loss of dynamic efficiency** - less profits means that firms have less money to reinvest into labour training schemes, buying capital & enhancing methods of production - sub-standard goods.
   But, firms may cut costs to make up for lost profits = productive efficiency
3. labour drain - workers are motivated by an increase in prospects/wages - only possiblibe when prices increase consistently.
   Firms inability to match wage demands may lead to the outflow of the best quality workforce to countries that have more of a free market approach.