1.4 Government Intervention LS20-23 Flashcards
Maximum price definition?
A price set below the market equilibrium price by the government
Minimum price definition?
A price set above the market equilibrium price by the government
What is a guaranteed minimum pricing scheme?
A scheme in which excess supply from a minimum price is purchased by the government at the minimum price
To protect producers’ incomes (i.e. farmers)
What are the advantages of minimum pricing schemes?
Producers’ incomes are stabilised = higher investment and employment
Greater security of food supply
Surplus can be stockpiled/used as an aid
What are the disadvantages of minimum pricing schemes?
- Surpluses may be sold overseas at low prices = increased competition for farmers = damaging for farmers in developing countries
- Opportunity cost of government finances: may have to raise taxes or cut gov spending in other areas
- Difficult to set price at right level: may be an information gap
- Storage and security costs for government
What is a pollution permit?
Allocated by the government to allow firms to pollute up to the limit set
How do tradeable pollution permits work?
Gives firms the right to pollute up to a limit
If firms pollute below the limit set, permits are not used so can be sold
If firm breaks the pollution limit, they will face fines unless they purchase pollution permits
What is the advantage of maximum prices?
Prices are lowered for consumers
What is the disadvantage of maximum prices?
- Shortages created (reduced incentive for suppliers, excess demand)
- Black markets may emerge
- Difficult to set the price at the right level (could be an information gap)
- Fall in producer surplus could = long-term decline in quality of goods/services
What are the advantages of minimum prices?
For agricultural markets, food stability is increased
Can reduce consumption of demerit goods
Producer incomes are protected
What are the disadvantages of minimum prices?
Excess supply created = some producers unable to sell goods = potential for losses
=> also = waste of resources that could have been used productively elsewhere
Higher prices for consumers = lower consumer surplus
What are the advantages of an Emissions Trade Scheme (TPPs)?
- Market created for buying/selling pollution permits = internalising the external costs of carbon emissions
- Incentive given to invest in pollution reducing technology
- Cleaner firms rewarded and less environmentally firms punished
- Unused permits can be sold/banked = further incentive to reduce carbon emissions
- Government revenue could be raised by selling permits instead of giving them away for free
What are the disadvantages of an Emissions Trade Scheme (TPPs)?
- If there’s an information gap could = too many permits issued = little/no incentive for firms to reduce pollution
=> OR could = too few permits issued = reduced international competitiveness = decline in net exports = decline in economic growth - Producers could pass the added cost to consumers (price inelastic goods/services likely to become more expensive)
- May be volatile prices = uncertainty for businesses
- If permits given away for free = missed opportunity to raise gov revenue
- Costs of operating and monitoring the scheme
Regulation definition?
A rule or law enacted by the government that must be followed by economic agents
Used to encourage a change in behaviour
How does regulation aim to correct market failure?
Provides an incentive to change behaviour toward the socially optimum level of output
If correctly implemented, leads to the removal of a welfare loss (or gain for +ve externalities)
What are the disadvantages of regulation?
- Cost: costly in administration and enforcement
- Setting the right level of regulation can be difficult
- May encourage black market activity
- Unintended consequences may arise
Command aspect of regulation?
Bans (e.g. public smoking ban)
Limits (e.g. age limits on buying alcohol etc.)
Caps (e.g. carbon emissions)
Compulsory action (e.g. graphic health warnings on cigarette packets)
Control aspect of regulation?
Enforce
Punishment
Government failure definition?
When government intervention designed to correct a market failure results in a less efficient allocation of resources
What are the causes of government failure
- Unintended consequences
- Distortion of price signals: max and min prices can result in shortages and gluts (oversupply), subsidies can result in overconsumption of a good with external costs (subsidies for sugar farmers)
- Excessive administrative costs: admin costs may outweigh any benefits
- Information gaps: lack of sufficient information can lead to gov intervention being set in an ineffective manner
