1.4.1 Government intervention in markets Flashcards
What is government intervention
Give examples
When the government take action in the market to try and correct market failure. There are a number of methods including
indirect taxing
subsidies
maximum and minimum price control.
Others include tradeable pollution permits, regulation and state provision of public goods.
How may indirect tax be used to correct market failure
Indirect tax may be imposed on negative externalitites in order to push prices higher and shift the market equilibrium towards the social optimum rather than private optimum. The higher imposed tax will cause cost of production to rise therefore reducing supply. As a result negative externalitites will no longer be oversupplied/consumed correcting market failure as resources are no longer misallocated and are allocative efficient.
How may maximum price control be used to correct market failure
Maximum price control is where the government set the price to be below the market equilibrium and this new price point being the maximum threshold. This is to increase affordability and reduce consumer exploitation. Although the new reduced price would lead to disequilibrium and excess demand.
How may minimum price control be used to correct market failure
This is where the new price point is set above the equilibrium and cannot fall below this new point Examples may be national minimum wage. This will also prevent exploitation in the labour market as well as allocate resources more efficiently.
How may subsidies be used to correct market failure?
Subsidies/government grants will encourage output by firms due to avergae costs now decreasing perhaps due to the good/service being a merit good. Supply will increase and markets will be more allocative efficinet as merit goods/positive externalitites tend to be underconsumed however with the subsidy market will be allocatively efficient.
How may tradeable pollution permit schemes be used to correct market failure
Tradeable pollution permits incentivise firms to reuduce carbon emissions (negative externalitites) as if firms do not pass the threshold they are allowed to trade these with other firms and have an opportunity to profit. Firms in order to emit higher levels of carbon must buy these tradeable permits although this adds to cost of production thus forcing firms to reduce pollution emissions or take the burden of costs. Hence an effiecnt method in reducing the negative produxtion exterbality and correcting market failure.
How does the state provision of public goods correct market failure
Public goods would be underprovided as private sector firms have no intent in provididng public goods due to the inability of profitising as the free rider problem exists. As a result there would be missing markets the biggest type of market failure however the government intrevene to provided these goods/services correcting the market failure.
