1.4.1 - Government Intervention In Markets Flashcards
What Are The Reasons For Government Intervention In Markets?
(5 Points)
~ Support households.
~ Correct market failure.
~ Support firms.
~ Promote equity.
~ Collect government revenue.
Describe The Use Of Indirect Tax In Solving Market Failure Such As Negative Externalities In Production
(6 Points)
Diagram Steps:
~ MPC curve shifts left to form, MSC = MPC + Tax.
~ New equilibrium is at Q*
Theory:
~ Increases firms costs of production, raising price and decreasing quantities.
~ Internalises the externalities, polluter pays for the externalities they are generating.
~ Solves over consumption and production.
~ At Q*, meaning that AE is promoted.
~ Generates government revenue, to further solve market failure.
Describe The Use Of Indirect Tax In Solving Market Failure Such As Negative Externalities In Consumption
(7 Points)
Diagram Steps:
~ MPC curve shifts left to form, MPC + Tax.
~ New equilibrium is at Q*
Theory:
~ Increases firms costs of production, raising price and decreasing quantities.
~ Internalises the externalities, polluter pays for the externalities they are generating.
~ Solves over consumption and production.
~ At Q*, meaning that AE is promoted.
~ Generates government revenue, to further solve market failure.
What Are Issues With Using Indirect Tax To Solve Market Failures?
(3 Points)
~ Might be price inelastic demand, meaning price will go up but consumers will still pay the price if they are addicted.
~ Governments do not have perfect information to place tax at the right level.
~ Overtaxation can lead to black markets forming.
Describe The Use Of Subsidies In Solving Market Failure Such As Positive Externalities In Consumption
(5 Points)
Diagram Steps:
~ MPC curve shifts to the right, to form MPC + Sub.
Theory:
~ Decreases costs of production, lowering the price and increasing quantity.
~ Solves under consumption or production issues.
~ At Q*, meaning AE is being promoted and welfare is being maximised.
~ There is a cost to the government.
Describe The Use Of Subsidies In Solving Market Failure Such As Positive Externalities In Production
(6 Points)
Diagram Steps:
~ MPC curve shifts right, to form MSC = MPC + Sub.
~ New equilibrium at Q*.
Theory:
~ Decreases costs of production, decreasing price and increasing quantity.
~ Solves under consumption or production issues.
~ At Q*, meaning AE is being promoted and welfare is being maximised.
~ There is a cost to the government.
What Are Issues With Using Subsidies To Solve Market Failures?
(5 Points)
~ Costly for the government, generating an opportunity cost.
~ Debt interest, might have to paid if the money is borrowed.
~ Governments do not have perfect information to place subsidy at the right level.
~ Firms may not use it in the way that is intended.
~ There might be price inelastic demand.
What Is Regulation?
(2 Points)
~ Rule / Law enacted by the government that must be followed by economic agents, to encourage a change in behaviour.
~ Can solve over production and consumption and under production and consumption market failures.
What Are The Laws, Regulation Can Make?
(6 Points)
~ Bans.
~ Limits.
~ Caps. E.g. Pollution caps.
~ Enforcement.
~ Punishment. E.g. Fines.
~ Compulsory. E.g. Graphic imagery on cigarettes.
What The Issues When Using Regulation To Solve Market
Failures?
(3 Points)
~ Costly, administrating and enforcement costs.
~ Needs to be set at the right regulation, if not can cause unintended consequences and can cause consumers to turn to black markets.
~ Firms can try and cheat the regulation.
Describe Tradable Pollution Permits
(6 Points)
~ Cap is set at Q*.
~ Government issues permits, to match the price gap, creating a market for permits.
~ Firms make a decision, based on the least cost -> Invest in green energy or buy spare permits.
~ Leading to the externality being internalised, as they are paying for their pollution costs.
~ With strict enforcement pollution goes down to the social optimum, AE will be maximised.
~ Policy promotes LR incentives to invest into green energy, as overtime the gov reduce the number of permits.
What The Issues When Using Tradeable Pollution Permits To Solve Market Failures?
(3 Points)
~ Costs of enforcement and whether there is sufficient enforcement to make firms follow the rules.
~ Imperfect information for governments, leading to unintended consequences.
~ Higher costs of production, means higher costs for consumers.
What Is State Provision Of Public Goods?
~ Direct provision of products by the government, free at the point of consumption.
~ As there would be no market for these goods, as private firms have no incentive to supply them.
~ There is a missing market, with regards to public goods.
What The Issues When Using State Provision Of Public Goods To Solve Market Failures?
(4 Points)
~ Creates excess demand, as QD > QS, and there is no price charged.
~ Costly and represents an opportunity cost.
~ Imperfect information, quantity may not be at the right point.
~ State run organisations are usually inefficient, as they lack a profit motive.
Describe Minimum Prices To Solve Market Failures
(4 Points)
~ Discourage consumption of demerit goods.
~ Over production and consumption at Q1.
~ Minimum price imposed, demand contracts as consumption is discouraged.
~ QD falls from Q1 -> Q*.
What The Issues When Using Minimum Prices To Solve Market Failures?
(4 Points)
~ If there is price inelastic demand, makes it harder to get to Q*.
~ Regressive, burdens the poor, widening income inequality.
~ Higher prices, meanings black markets are generated.
~ Unintended consequences.
Describe Maximum Prices To Solve Market Failures
(2 Points)
~ Promotes consumption of essential products.
~ Prices are lower, causing an extension in demand.
What The Issues When Using Maximum Prices To Solve Market Failures?
(4 Points)
~ Creates shortages (Excess demand), not everyone is able to purchase the product.
~ Excess demand leads to the creation of black markets.
~ Enforcement costs.
~ Is the max price set at the right level.
Describe Information Provision To Solve Market Failures
(2 Points)
~ Government funded information provision to encourage (Merit goods) or discourage (De-merit goods) consumption.
~ Helps consumers make rational decisions, increasing the MPB.
What The Issues When Using Information Provision To Solve Market Failures?
(3 Points)
~ Expensive.
~ No guarantee of success.
~ Takes a long time for consumers to take in the information.
