1.4.1 and 1.4.2 Flashcards
Why do governments intervene into markets?
To overcome market failure (an inefficient distribution of goods and services in the free market.)
What’s a subsidy?
A form of financial support (or other) given to producers and sometimes consumers.
Draw a subsidy diagram that shows government intervention
- Y axis labelled as price
- X axis labelled as quantity
- Demand line
- Supply line
- Equilibrium points and lines
- Labels across axes
Then:
Supply shifts out to “S1 + subsidy” since the subsidy incentives and allows for business to produce more of that good.
*4 more labels on the shift out as well
Draw a tax diagram that shows government intervention
- Y axis labelled as price
- X axis labelled as quantity
- Demand line
- Supply line
- Equilibrium points and lines
- Labels across axes
Then:
Supply shifts in to “S1 + tax” since the tax means a higher cost for businesses to produce more of that good.
*4 more labels on the shift in as well
Draw a maximum + minimum price diagram that shows government intervention
- Y axis labelled as price
- X axis labelled as quantity
- Demand line
- Supply line
- Equilibrium points and lines
- Labels across axes
- Max price labelled below P1 with equilibrium lines from the demand and supply curve
- Min price labelled above P1 with Equilibrium lines from deamsn and supply curve
What’s net welfare loss
The lost welfare as a result of too much or too little production and consumption of a good or resource.
What’s a trade pollution permit?
Permits involve giving firms a legal right to pollute a certain amount e.g. 100 units of Carbon Dioxide per year.
How do trade pollution permits work?
They allow firms to pollute a specific amount and can be bought from other firms or the government.
This incentivizes firms to reduce pollution over time.
What’s provision of info?
When the government provides info about products and services to reduce or increase consumption.
For example, the smoking packaging showing the consequences.
What’s regulation in terms of government failure?
The government sets rules in order to increase or decrease the consumption of certain goods and or services.
Name 2 reasons of government failure
- Information gaps
- Unintended consequences
- Excessive administrative costs
- Distortion of price signals
What’s an info gap and how does it cause government failure?
When a producer, consumer or government does n’t have enough info to make a rational economic decision.
Without perfect information, there may be unintended consequences when the government intervenes.
What are excessive administrative costs and how do they causes government failure?
This is when the social benefits may not be worth the financial cost of making the policy.
This may create an opportunity cost/trade-off between which policies and this links back to information gaps.
