1.4.1 Government Intervention in Markets Flashcards
Apart from Taxations and Subsidies, name 4 other market interventions
Trade pollution permits
State provision of public goods
provision of information
regulation
What is a regulation
and legislation
regulation: are rules enforced by an authority (government). Normally backed by laws
Legislation; means legal action can be taken for those who break rules
describe 12 benefits to regulation legislation
- Act as a spur of business innovation
- More effective if demand is unresponsive
- Can be gradually toughened
- Straightforward for businesses to understand
- Imposed quickly
- Legally binding
- Can reduce demerit goods/services
- Can reduce the power of monopolies e.g. setting up a regulatory body
- Can provide protection for consumers and producers from problems arising from asymmetric information
- Cheap to Implement
- Revenue from the fines can be used to correct cause of market failure or compensate those affected by the externality.
- Most effective when the cost of the fine is greater than the benefits of ignoring the regulation.
Describe 8 drawbacks to regulation/legislation
- High cost of enforcement
- Costs of meeting regulations may discourage small/new businesses
- May encourage illegal trade/hidden economy
- Difficult to fix the right level of regulation - value of judgment
- This creates extra costs - Is likely to push up the cost of production and therefore reduce businesses’ profits or consumers end up paying if demand is inelastic
- Ideally the correct level would be where the economic benefit arising from the reduction in externality would be equal to the economic cost imposed by the regulation.
- Can put firms at a competitive disadvantage if similar regulations are not applied overseas.
- Regulations don’t discriminate between the costs of reducing externalities - one firm may be more polluting than another
What is information provision
Designed to changed perceived benefits (MPB) and cost (MPC) for consumers when making decision in the market
Therefore stopping partial market failure through stopping information failure
The information is given to try and help consumers make rational decisions and prevent market failure caused by consumers and producers having asymmetric information
Describe 5 benefits of information provision
- Stop information failures and therefore problems with consumption and price in the price mechanism
- Positive spillover effect like better social welfare is better decision are made by consumers
- tailored to the needs of the particular market.
- The provision of info should impact the demand for the goods. Government will try to increase demand for merit goods (thinks beneficial for society) and reduce the demand for demerit goods (harmful goods)
- Can be supported by regulation to ensure all firms carry it out.
describe 6 drawbacks to information provision
- Difficult to identify exactly what information is missing so that accurate decisions can be made
- Assume that agents of the economy act rationally
- Social norms/habitual behaviour/herd behaviour
- Unless regulated it has no direct consequence
- Information campaigns can be expensive.
- The effectiveness of government information campaigns is often questioned
What is a pollution permit
Placing a price on Carbon dioxide and other greenhouse gases
Implemented through a carbon tax or a cap-and-trade scheme using tradable permits
Carbon trading is a form of pollution control that uses the price mechanism to change relative prices and the incentives of producers and consumers to reduced carbon emissions
Describe 7 benefits to pollution permits
- If Carbon prices are higher, would encourage innovation investment
- These schemes are a good way to reduce pollution as they encourage firms to be more efficient and pollute less. (externality)
- Using Permits tends to cost industry less than if you were to use regulation.
- A market is created for buying and selling the permits. Businesses that don’t use their permits can sell them on.
- The number of permits can be reduced over time to ensure that pollution targets are met.
- The government can sell additional permits and use this money to compensate victims and reduce the externality.
- These schemes internalise the externality of pollution since the polluter is the one trying to fix the problem.
Describe 7 drawbacks to pollution permits
- Prices of CO2 per tonne is volatile and in recent years, has been extremely low, due to, too many permits and cap being set too high
- Deciding upon the right number of permits to allocate can be difficult.
- Some firms have taken legal action against the government and the EU if they feel they should have received a bigger allowance.
- Firms might pass on the cost of buying the pollution permits onto the customer. This leads to higher prices.
- Not worldwide
- There is a cost to the government of monitoring pollution emissions
- There is less pressure on major polluting forms to actually clean up their act if it is easy to buy permits from elsewhere.
Pollution permits may create an entry barrier for new firms to enter the industry, so restricting competition.
The pollution permit creates another market and there might be market failure here too.
There are admin costs involved in permit schemes to both the firm and the government
What is state provision of public goods
A public good is one that is both non-excludable and non-rival. They cause the problem of the missing market, because no producer will want to supply a good, they cannot make any revenue off – meaning complete market failure.
The government therefore must decide what output of public goods is appropriate for society
Benefits to state provision of public goods
- The non-rival nature of consumption provides a strong case to replace the market to provide public goods
- Many Public good are free at the point of delivery and funded by taxations or licence fees
- Stops under provision and under-consumption so social welfare is improved
- Providing public good helps affordability and access to important services for lower income households, therefore help inequalities
- They could provide public good more efficiently due to economies of scale
Drawbacks to state provision to providing public goods
- If the Gov becomes a monopoly provider, there is a danger of lack of efficiency arising from lack of competition
- Many other demands of Government finances, and cause an opportunity cost of public goods being provided
- To overcome this, the state funds private sector to provide public goods
