Microeconomics - Government Intervention

Question 1

why would an underconsumption of merit goods cause government intervention?

Answer 1

gov’s may want people to consume more things eg education which has positive externalities and encouraged using subsidies or free state provision

Question 2

how will meeting basic needs cause government intervention?

Answer 2

consumers ability to consume goods and services depends on their income and wealth and a low income means they may not be able to afford basic goods to satisfy their needs and the market is under-providing these goods which can be a source of market failure

Question 3

how can an overconsumption of demerit goods cause government intervention?

Answer 3

demerit goods eg vapes may be overconsumed and taxes and bans may solve the issue

Question 4

how is improving information a policy objective for governments to intervene?

Answer 4

govs aim to improve the wellbeing of their citizens by encouraging them to make rational choices through reducing asymmetric information by giving consumers as much information as possible about their choices eg league tables for schools

Question 5

how is focusing on SME’s a policy objective for government intervention?

Answer 5

small to medium size businesses benefit from deregulation and helps the government to achieve their goals

Question 6

What are the powers of the competition and markets authority?

Answer 6

can force the break up firms which have become too powerful in a market and can force a firm to split or sell assets to increase competition

Question 7

why may governments prevent monopolies?

Answer 7

monopolies through mergers can be inefficient as they restrict quantity and agree to raise price to a price level that isnt allocatively efficient so governments use blocking mergers and mergers are investigated which have one firm with >25% market share

Question 8

how does regulation reduce monopoly power?

Answer 8

price ceiling restricts the amount firms can raise their prices which reduces the potential losses in efficiency or excessive profits are taxed

Question 9

why do governments encourage competition through technological advances?

Answer 9

firm investment in tech leads to positive spill over effects as the technology is shared through an economy and each technological breakthrough pushes society further forward and leads to improved welfare

Question 10

why do governments encourage competition through higher quality?

Answer 10

consumers will choose goods of higher quality as they bring more utility and improved welfare

Question 11

Why does competition policy need high quality information?

Answer 11

governments can take action and push anti-competitive behaviour to improve efficiency if they recieve trustworthy info but it needs to be high quality and there is an opportunity cost to collecting information

Question 12

what is price capping?

Answer 12

Where firms can only raise prices by a capped amount (typically taking inflation into account) to reduce the benefit to firms and consumers can access the goods and services at what the gov deems fair price

Question 13

what is regulation and deregulation?

Answer 13

regulation - setting rules for firms by the gov to correct market failure
deregulation - loosening of rules

Question 14

what are some costs of deregulation?

Answer 14

customers not protected from anti-competitive behaviour of firms and some market failures cannot be fixed eg problem with externalities and some natural monopolies need regulation

Question 15

what are some benefits of deregulation?

Answer 15

allocation of resources improves as the gov reduce interference with the free market so efficiency improves

Question 16

what are some benefits of regulation?

Answer 16

can correct market failures which arise from externalities and controls monopolies and stops them from taking advantage of customers and reducing welfare and punishes firms for anti-competitive behaviour

Question 17

what are some costs of regulation?

Answer 17

hard to know which industries to regulate and how to regulate them and can be expensive to monitor firms to enforce regulation and there is an opportunity cost

Question 18

what is regulatory capture?

Answer 18

firms may influence the regulating body so they favour the firm in any decisions and the regulator prioritises the interest of the firms rather than the consumer which causes government failure

Question 19

what are revolving doors?

Answer 19

when investment bankers go on to work in government or in regulators

Question 20

What is state provision?

Answer 20

Goods and services provided directly by the government payed through tax revenues eg NHS and police

Question 21

what are some advantages of state provision?

Answer 21

state provision can reduce inequality by redistributing money from wealthy to poor and services may not exist without provision as they arent profitable

Question 22

what are some disadvantages of state provision?

Answer 22

less incentive to make services efficient without a drive for profit and there is an opportunity cost of providing one service for another and there is a risk of government failure with asymmetric info

Question 23

what is privatisation?

Answer 23

Public Private Partnerships - when private firm completes project for the government that benefits the public

Question 24

what are some advantages of privatisation?

Answer 24

incentive for profit means resources will be allocated more efficiently and the gov gain revenue that can be put to alternative use when the government sell of their enterprise

Question 25

what are some disadvantages of privatisation?

Answer 25

drive for efficiency means element of humanity is lost and the safety and spending on safety measures may be worse in privatised industry that are judged only on profits

Question 26

what are specific taxes?

Answer 26

paid per unit and increase the cost of production by the tax amount on each unit which decreases price eg fuel duty as there is a 59p tax per litre on the consumption of petrol

Question 27

what are Ad Valorem Taxes?

Answer 27

based on the value of the good being sold and increase the price by a fixed percentage eg VAT has 20% tax

Question 28

What is the burden of a tax?

Answer 28

imposed taxes cause producers to pass some of the cost to the consumer by a higher price and absorb the rest. inelastic demand eg cigarettes causes more of a tax to be passed on to consumers as the demand wont decrease much

Question 29

what are some disadvantages of taxes?

Answer 29

can lead to increase in inequality eg taxes on alcohol are regressive as they take up a disproportionate amount of income
market failure remains if taxes are too low yet taxes too high reduces competitiveness of firms and over-correct market failure

Question 30

what are some advantages of taxes?

Answer 30

can help fund government expenditure which includes correcting adverse effects of the goods they are taxing
taxing demerit goods can lead to consumers choosing less damaging substitutes

Question 31

What are indirect taxes?

Answer 31

taxes on household spending and consumption and applied to goods and services

Question 32

How can smoking be a form of market failure?

Answer 32

people unaware of the negative impact of cigarettes in their health and the negative externalities of smoking arent considered by consumers

Question 33

Why would governments place an indirect tax on cigarettes?

Answer 33

raises cost of production which shifts the supply curve towards socially optimal level

Question 34

What are subsidies?

Answer 34

a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.

Question 35

how can subsidies correct market failure?

Answer 35

encourages consumption and production of a good with positive externalities

Question 36

what are some advantages of subsidies?

Answer 36

can reduce cost of product and allow firms to exploit EOS which improves long run efficiency and abroad competiveness

Question 37

what are some disadvantages of subsidies?

Answer 37

may encourage laziness from producers as they dont need to be efficient and goods may be of a lower standard

Question 38

what does a subsidy do to a positive consumption externality?

Answer 38

consumption subsidy will try to cut the price paid by consumers to p0 t increase consumption

Question 39

what does a subsidy do to a positive production externality?

Answer 39

subsidy will shift the supply curve rightwards to the MSC curve

Question 40

what is the impact of indirect taxes on governments?

Answer 40

generate revenues for governments which can be spent on capital investment or transfer payments.
inelastic demand will increase tax revenues and the burden of tax falls onto consumers which may not be good intervention for the government if the market was made up of mainly poor consumers

Question 41

what is the impact of indirect tax on consumers and producers?

Answer 41

perfectly inelastic demand causes the QD to stay the same but price would rise and the burden of tax falls on the consumers yet perfectly elastic demand causes the burden to fall on the producer

Question 42

what is an example of a subsidy?

Answer 42

employment of apprentices can be subsidised by a government

Question 43

what is the impact of subsidies on consumer and producer surplus?

Answer 43

consumer surplus rises as price consumers pay has fallen and output has risen
producer surplus rises because price consumers pay + subsidy is higher than the price as the previous equilibrium

Question 44

what is the impact of a subsidy on the government?

Answer 44

producer and consumer surplus rises yet the gov pay the size of the per unit subsidy x total output and governments must pay for subsidies using tax revenues for government borrowing

Question 45

what are some costs of tradeable pollution permits?

Answer 45

cost to implement the scheme
hard to decide on the level of pollution
market for permits subject to failure

Question 46

what are some benefits of tradeable pollution permits?

Answer 46

system can cap the level of pollution
lower pollution of a firm the more they benefit which encourages firms to lower pollution levels and governments make revenue

Question 47

what are some advantages of subsidies and indirect taxation on the environment?

Answer 47

offering financial incentive for firms to reduce production levels is effective
funds from tax can be used in a related area

Question 48

what are some disadvantages of subsidies and indirect taxes on the environment?

Answer 48

firms could relocate and resume existing levels of production elsewhere
taxes internalise the externality but many externalities are difficult to quantify
subsidies expensive to operate and abused by firms

Question 49

what does the success of subsidies and indirect taxes depend on?

Answer 49

firms wont relocate if there is a coordinated approach between countries
extent that firms can pass costs onto consumers depends on the elasticity of demand for the product

Question 50

what are some advantages of regulation and legislation on the environment?

Answer 50

provide strong incentive for firms to abide by them
offer clear instructions which leaves firms with no option but to follow

Question 51

what are some disadvantages of legislation and regulation on the environment?

Answer 51

firms likely to seek loopholes in legislation and can be time consuming to enforce

Question 52

what does the success of legislation and regulation depend on?

Answer 52

depends on how well the legislation is worded and the resources used to enforce them and the severity of punishments for breaching legislations

Question 53

what are some advantages of tradeable pollution permits?

Answer 53

allow price mechanism to be used so could be allocative efficiency
inefficient firms in energy use during production will face highest costs

Question 54

what are some disadvantages of tradeable pollution permits?

Answer 54

can be abused by large powerful names who may hoard permits and sell to the highest bidder to increase profit
permits can be expensive and time consuming to implement and enforce and can have little effect on reducing the emissions of very profitable firms

Question 55

what does the success of tradeable pollution permits depend on?

Answer 55

if emission ceilings are set too high the price of permits will be too low

Question 56

what is a maximum price?

Answer 56

policy to increase consumption levels of a good and new maximum price above equilibrium doesnt change anything yet below equilibrium creates more demand but shortage of supply and leads to excessive demand so more people can afford the good yet less people can have it as the supply is restricted which may lead to the good being sold in a black market

Question 57

what is a minimum price?

Answer 57

used to correct failures which happens under monopsony power and new min price under equilibrium doesnt change anything yet above equilibrium creates less demand but increased supply and excessive supply

Question 58

what are the pro and cons of a maximum price?

Answer 58

pros- protects consumers from exploitation and makes sure firms are more efficient by forcing them to pay more attention to costs

Cons - max price can deter firms from entering the market and limits investment into the industry as the amount of profit firms make is limited

Question 59

what are pros and cons of a minimum price

Answer 59

pro- suppliers get reasonable price

Cons - consumers paying more for their goods and resources wasted when excessive goods destroyed and allocated inefficiently as they could have been used elsewhere instead of producing excess supply

Question 60

what is a buffer stock scheme?

Answer 60

policy used to stabilise the price of important commodity which usually have inelastic demand and supply

Question 61

what is the impact of the buffer stock scheme?

Answer 61

requires a lot of time and expense from the government running it eg 2 poor harvests in a row may mean the gov is running out stock

Question 62

what is cost benefit analysis?

Answer 62

a study that compares the costs and benefits to society of providing a public good

Question 63

how does administrative costs cause government failure?

Answer 63

resources needed to implement gov intervention buy may not be worthwhile if costs are too high

Question 64

how does market distortions cause government failure?

Answer 64

can affect the price mechanism due to gov intervention eg income taxes give people less incentive to work hard which reduces efficiency