1.4 Government Intervention Flashcards
Why do governments intervene in markets? give examples
To correct market failure. E.g Healthcare and education
Give methods of government intervention
Indirect taxes (ad Valorem and specific)
Subsidies
Maximum and minimum prices
Why do governments implement max prices?
To encourage consumption/production and make sure it does not become too expensive
How could a max price impact firms?
May increase efficiency however likely to Lead to lower profits and possibly less investment in the long run. Also, may raise price of other goods negating consumers benefits.
How might a max price impact consumers?
Lower prices
Why do governments implement min prices? give examples
To discourage consumption of goods e.g alcohol
How might a max price lead to government failure?
If gov misjudge where equilibrium price is and set above equilibrium price.
What are tradable pollution permits? give examples
Firms can pollute a certain amount and trade any surplus.
e.g limit on co2 pollution in steel industry
Advantages of pollution permits
Long run benefit due to development of greener production methods
Raising of gov revenue to be reinvested
Tradable nature of permits creates incentive for those that pollute less
Disadvantages of pollution permits
Firms may relocate
Firms may pass higher costs on to consumer
Competition restricted in market as permits may act as a barrier to entry.
Expensive to monitor
Reg capture
What is the state provision of goods?
Where gov provides goods that would otherwise be unprofitable e.g street lighting
Give positive of state provision of goods
Makes merit goods more accessible, increasing consumption and positive externalities
Give negative of state provision of goods
Could be expensive for government to provide, possible opportunity cost
What is provision of information? give examples
Gov provides information in order to prevent market failure due to asymmetric information. e.g second hand car dealers have to provide whole history of car
Give negatives of provision of information
Expensive, opportunity cost
Hard to regulate
Give example of regulation to prevent market failure
Gov making people stay in school until 16, and education or training until 18
Disadvantages of regulation
Difficult and expensive to implement
Possible black market for goods
Firms may pass higher costs onto consumers
What is government failure?
When government intervention in a market worsens the market failure, resulting in a net welfare loss to society
Give causes of government failure
Distortion of price signals, unintended consequences, excess admin costs, regulatory capture, information gaps
Outline distortion of price signals
Government subsidies could distort price signals by distorting the free market
mechanism. There could be an inefficient allocation of resources because the
market mechanism is not able to act freely
Outline unintended consequences
With government policies, consumers and producers react in unexpected ways. A policy could beundermined, which could make government policies expensive to implement, since
it is harder to achieve their original goals
Outline excessive admin costs
The social benefits of a policy might not be worth the financial cost of administering
the policy, may cost more than gov expected
Outline information gaps causing government failure
Some policies might be decided without perfect information. This might require a full
cost-benefit analysis, and it could be time-consuming and expensive
