1.4.1 Government intervention in markets

Question 1

What are the 5 reasons for government intervention?

Answer 1

/Support firms
/Correct market failure
/Promote equity
/Collect government revenue
/Support poorer households

Question 2

Explain how governments support firms?

Answer 2

Support firms: in a global economy, governments choose to support key industries so as to help them remain competitive.

Question 3

Explain how governments correct market failure?

Answer 3

Correct market failure: in many markets there is a less than optimal allocation of resources from society’s point of view.

Question 4

Explain how governments promote equity?

Answer 4

Promote equity: to reduce the opportunity gap between the rich and poor.

Question 5

Explain how governments collect government revenue?

Answer 5

Earn government revenue: governments need money to provide essential services, public and merit goods.

Question 6

Explain how governments support poorer households?

Answer 6

Support poorer households: poverty has multiple impacts on both the individual and the economy.

Question 7

What is Ad valorem tax?

Answer 7

Value added tax (VAT) is 20% in the UK in 2022. The more goods/services consumed, the larger the tax bill.

Question 8

What are subsidies?

Answer 8

Governments frequently use subsidies to encourage production/consumption of merit goods such as energy efficient products, electric vehicles, healthcare, and education.

Question 9

What are maximum prices?

Answer 9

A maximum price is set by the government below the existing free market equilibrium price and sellers cannot legally sell the good/service at a higher price.

Question 10

What are minimum prices?

Answer 10

A minimum price is set by the government above the existing free market equilibrium price and sellers cannot legally sell the good/service at a lower price.

Question 11

What are other methods of governments intervention?

Answer 11

/Trade pollution permits
/State provision of public goods
/Provision of information
/Regulation

Question 12

Explain trade pollution permits?

Answer 12

Governments create a pollution permit market and issue permits to polluting firms.

Question 13

Explain state provision of public goods?

Answer 13

Public goods are beneficial for society and are not provided by private firms due to the free rider problem.

Question 14

Explain provision of information?

Answer 14

Information gaps cause market failure. Governments can set up information portals so as to reduce the asymmetric information

Question 15

Explain regulation?

Answer 15

Governments create rules to limit harm from negative externalities of consumption/production.