1.4.1b2

Question 1

How does regulation aim to correct market failure

Answer 1

1) Regulation provides an incentive to change behaviour toward the socially optimal level of output.
2) If correctly implemented this leads to the removal of a welfare loss (or a welfare gain forpositive externalities)

Question 2

Cons of regulation

Answer 2

1) Cost - regulation is costly in two respects: enforcement and administration
2) Setting the right level of regulation can be difficult
3) It may encourage black market activity
4) unintended consequences may arise

Question 3

What is a guaranteed minimum pricing scheme

Answer 3

where the surplus output created is purchased by a
government agency at the minimum price. The main aim of such a scheme is to protect producer incomes.

Question 4

Pros of minimum pricing scheme

Answer 4

Producer’s incomes increase or stabilise → greater investment and employment
Greater security for food supply.
Surplus can be stockpiled or used as aid

Question 5

Cons of minmum pricing scheme

Answer 5

• Surpluses may be sold overseas at low prices. This could be damaging to farmers in developing countries that are likely to struggle to compete.
• opportunity cost of government finances. It may have to raise taxes or cut government spending in other areas.
• Difficult to set price at the right level. There may be an info gaps
• Storage and security costs for the stockpiles

Question 6

pros of provision of public goods

Answer 6

● This corrects market failure by providing important goods which would otherwise not be provided. It will lead to improved social welfare.
● It can help to bring about equality, by ensuring everyone has access to basic goods.
● There will be benefits of the goods themselves , for example by providing healthcare, the government ensures that the workforce is healthy and so this can improve economic growth.
● By using competitive tenders (looked at in Theme 3), the government can ensure efficiency.

Question 7

Cons of providing public goods

Answer 7

● This is expensive and represents a high opportunity cost for the government. Administration costs are a problem
● Since the market is not involved, the government may produce the wrong combination of goods as consumers can not indicate their preferences.
+ For example, there may be too many soldiers and too few hospital beds: if they were provided by the market, price signals would lead to a shift in resources. Democracy
aims to reduce this problem, since consumers can vote for political parties whose aims are similar to their own.
● The government may be inefficient at production since they have no incentive to cut costs.
● Government officials may suffer from corruption and conflicting objectives.

Question 8

What is provision of info

Answer 8

When there is asymmetric information, the government provides information to allow people to make informed decisions. They may also force companies to provide information.

Question 9

Pros of providing infor

Answer 9

● This helps consumers to act rationally, which allows the market to work properly.
● It is best if the government uses this alongside other policies . For example, it can make demand more elastic in the long run and so help indirect taxes to become more
effective at reducing output.

Question 10

Cons of providing info

Answer 10

● This can be expensive for the government to do, incurring an opportunity cost.
● The government themselves may not always have all the information, so it may be difficult to inform consumers.
● Consumers may not listen to the information provided due to irrational behaviour.