1.4.1

Question 1

In a free market system what view does the government take?

Answer 1

That markets are best suited to allocating scarce resources and allow market forces of supply and demand to set prices.

Question 2

What is the role of the government?

Answer 2

Maintain property rights, uphold the rule of law and maintain the value of the currency.

Question 3

What is government intervention?

Answer 3

When the state gets involved in markets and takes action to try to correct market failure, improve economic efficiency, impact upon the macroeconomic performance of the economy and/or change distribution of wealth and income.

Question 4

What can the government use when intervening?

Answer 4

Regulations
Taxes
Subsidies
Maximum and minimum prices to change price signals
better information/ direct provision

Question 5

What are types of market failure?

Answer 5

-Factor immobility
-Public good
-Negative externalilties and demerit goods
-Positive externalities and merit goods
-Information gaps
-High relative poverty
-Monopoly power in a market

Question 6

What is the consequence of factor immobility as a type of market failure? And an example of government intervention to tackle it?

Answer 6

Structural unemployment
State investment in education and training

Question 7

What is the consequence of public goods as a type of market failure? And an example of government intervention to tackle it?

Answer 7

-Failure of markets to provide pure public goods, free rider problem.
-Government funded public goods for collective consumption

Question 8

What is the consequence of negative externalities and demerit goods as a type of market failure? And an example of government intervention to tackle it?

Answer 8

-Over consumption of products that are ‘bad’ for us/society.
-Information campaigns, minimum age for consumption, indirect taxes

Question 9

What is the consequence of positive externalities and merit goods as a type of market failure? And an example of government intervention to tackle it?

Answer 9

-Under consumption of products that are ‘good’ for us/society.
-Subsidies, better information on private benefits

Question 10

What is the consequence of information gaps as a type of market failure? And an example of government intervention to tackle it?

Answer 10

-Damaging consequences for consumers from poor choices.
-Statutory information/labelling

Question 11

What is the consequence of high relative poverty as a type of market failure? And an example of government intervention to tackle it?

Answer 11

-Low income families suffer social exclusion, negative externalities.
-Taxation and welfare to redistrubute income and wealth.

Question 12

What is the consequence of monopoly power in a market as a type of market failure? And an example of government intervention to tackle it?

Answer 12

-Higher prices for consumers cause loss of allocative efficiency.
-Competition policy, measures to encourage new firms into a market.

Question 13

What is fiscal policy?

Answer 13

The use of government spending and/or taxation can be used to alter the level of demand for different products and the pattern of demand.

Question 14

How can indirect taxes be used to raise the price of products with negative externalities?

Answer 14

Designed to increase opportunity cost of consumption and shift market equilibrium to socially optimal level, causes market supply to decrease,

Question 15

How do subsidies to consumers lower the price of goods with positive externalities?

Answer 15

Boost consumption and output of products, increases market supply and lowers equilibrium price

Question 16

What are example of taxes?

Answer 16

-VAT(value added tax)
-Plastic bag charge
-Fuel duties
-Alcohol duties
-Tobacco duties
-Sugar tax

Question 17

What are examples of subsidies?

Answer 17

-Biofuel subsidies for farmers
-Apprenticeship schemes
-Subsidies for wind farm investment
-Child care for working families
-Subsidies to rail industry

Question 18

What are fiscal policy intervention?

Answer 18

-Indirect taxes
-Subsidies to consumers
-Tax relief
-Changes to taxation and welfare payments

Question 19

How cant tax relief be used on fiscal policy intervention?

Answer 19

Government may offer financial assistance such as tax credits for businesses investment in research and development

Question 20

How can change to taxation and welfare payments be used as fiscal policy intervention?

Answer 20

Can be used to influence the overall distribution of income and wealth.

Question 21

What is a stakeholder?

Answer 21

Any person or organisation that has an interest in a specific project or policy decision.

Question 22

When do stakeholder issues typically come into play?

Answer 22

Major infrastructural projects where a cost benefit analysis is undertaken to assess the likely social costs and benefits

Question 23

What are examples of stakeholders?

Answer 23

-Employers of a business
-Creditors
-Professional associations
-Suppliers to a business
-Local/national communities
-Shareholders/investors/finaciers

Question 24

What is always the aim of an indirect tax?

Answer 24

To internalise a negative externality

Question 25

Why is implementing indirect taxes hard?

Answer 25

-Setting the right tax rate -Cost of collection -Price inelastic demand -Redistrubtion effects -Increased costs

Question 26

What are the arguments for a sugar tax?

Answer 26

-External costs of consuming sugary drinks -Information failures people underestiamte long-term effects of consumption -Sugar tax raises revenue -Tax encourages healthier alternatives

Question 27

What are the arguments against a sugar tax?

Answer 27

-Regressive on low income families -Other policies may be more effective -May switch to cheaper sugary products -Risk of lost jobs that rely on drink sales -Producers swapping low-calories sweetners for sugar

Question 28

What are advantages of subsidies?

Answer 28

-Greater efficiency -Subsidise public transport = less drivers = reduce their negative externalities -Long term help change preferences, encourages firms to develop goods with positive exeternailties

Question 29

When does market failure happen?

Answer 29

The price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social welfare loss

Question 30

When does market failure exist?

Answer 30

The competitive outcome of markets is not satisfactory from the pov of society

Question 31

When does complete market failure occur?

Answer 31

When the market simply does not supply products at all

Question 32

When does partial market failure occur?

Answer 32

The market does actually function but it produces the wrong quantity of a product or at the wrong price.

Question 33

What is a maximum price?

Answer 33

Legally-imposed maximum price/price ceiling in a market that suppliers cannot exceed.

Question 34

How can a maximum price be effective?

Answer 34

If it is set below the existing free market equilibrium price.

Question 35

What type of markets do maximum prices often lead to?

Answer 35

Secondary markets developing due to scarcity of supply means that consumers are willing and able to pay above regulated price

Question 36

What type of economic judgement does a maximum price involve?

Answer 36

Normative judgement on behalf of the government about what the price should be

Question 37

What is a minimum price?

Answer 37

It is a legally impose price floor below which the normal market price cannot fall

Question 38

How can the minimum price be effective?

Answer 38

Has to be set above the normal equilibrium price

Question 39

How can a polluter pay principle be implemented?

Answer 39

Carbon tax Cap-and-trade scheme using tradeable permits

Question 40

What is carbon trading?

Answer 40

A form of pollution control that uses the market mechansim to change relative prices and the incentives of producers and consumers to reduce their emissions.

Question 41

What is the EU carbon emissions trading scheme?

Answer 41

cap and trade system

Question 42

What does the tradeable pollution permit scheme do?

Answer 42

Sets a decreasing cap for CO2 from energy intensive industries, then allocates/auctions emissions allowances which can be traded on the open market

Question 43

Why is the carbon cap reduced over time?

Answer 43

Higher the price, greater incentive to cut pollution. Increasing scarcity of permits leads to increase in price

Question 44

What does the UK carbon price floor apply to?

Answer 44

Fossil fuels used for electricity generation

Question 45

What is the minimum price for carbon emissions designed to do?

Answer 45

Provide a stable carbon price signal as a way of internalising externailties.

Question 46

What are the arguments for a carbon price floor?

Answer 46

-Reduces risk and costs of investing in new nuclear capacity -Reduces carbon price volatility -Makes low carbon electricity more competitive

Question 47

What are the disadvantages of a carbon price floor?

Answer 47

-Better to restrict total supply of carbon permits than to increase market price -Carbon tax is more effective and raises tax revenues -Price floor may damage international competitiveness

Question 48

What are the advantages of a carbon tax?

Answer 48

-Pollution tax internalises the externality and makes the polluter pay -Fee on imported goods reduces risk of domestic businesses re-locating to avoid tax -Raises tax revenue -May be offsetting tax cuts on unemployment/childcare

Question 49

What are the disadvantages of a carbon tax?

Answer 49

-Low price elasticity of demand -Higher structural unemployment of workers in carbon intensive sectors -The burden of carbon tax falls heavy on low income families -Damage competitiveness of domestic businesses in oversea markets

Question 50

What are the arguments for regulation as a way of correcting market failures?

Answer 50

-Spur business innovation -More effective if demand is unresponsive to price changes -Can be gradually toughened each year (helps stimulate capital investment) -Straightforward to understand and for business to apply -Imposed quickly

Question 51

What are the risks/disadvantages from heavy use of regulations in markets?

Answer 51

-High cost of enforcement -Lead to unintended consequences/gov failure -Cost of meeting regulations can discourage small businesses/less competition -Tax leads to revenue but regulations is just a cost -Start illegal trade, increases time/cost of police