1.4.1 Flashcards
Reason for government intervention
Government intervenes in the market to correct market failure
Maximum price
Gov might set a maximum price where the consumption of production of a good is to be encouraged
Have to be set below the free market price
Advantages of maximum price
Prevent monopolies
Lead to welfare gain for consumers
Disadvantages of maximum price
Reduce firms profits, lead to less investment
Could lead to gov failure if they misjudge where the optimum market price should be
Minimum price
Gov might set a minimum prove where the consumption or production if a good is to be discouraged
Eg, national minimum wage
Has to be set above the free market price
Advantages of min price
Yield the positive externalities of a decent wage
Tradeable pollution permits
Limit the amount if negative externalities
Firms will be allowed to pollute up to a certain amount
Advantages of trade pollution permits
Benefit the environment in the long run
Raise revenue from the permit
If firms exceed their permit, they’ll need to purchase more permits
Disadvantages of trade pollution permits
Lead to some firms relocating to where they can pollute without limits
Firms might pass the higher costs of production onto consumer
Competition could be restricted in the market, create a barrier to entry
- could be expensive for governments to monitor emissions
State provision of publicc goods
The government could provide public goods which are inderprovided on the free market
Have external benefits
Merit goods more accessible
Could be expensive
Provision of information
By providing information, governments can ensure there is no market failure, so consumers and firms can make informed economic decisions
Regulation
The government could use laws to ban consumers from consuming a good
Positive externalities - higher skilled workforce
