1.8 Government intervention and government failure Flashcards
What is Laissez faire economics?
Markets are best suiting to allocating resources and allowing market forces to set prices
The government protects property rights, upholds laws and maintains currency value
What are some examples of market failures and intervention
Factor immobility - investment in education and training
Public goods - state provision
Externalities - taxation, information campaigns, minimum ages
Positive externalities - subsidies, education and information
Information gaps - information / labelling
Poverty - redistribution with taxation
Monopoly power - competition policy
What is some general evaluation on government intervention?
- Mainly value judgements
- Intervention changes prices to change effects
- Social science so may be inaccurate
- Policies may be made up of multiple
- Market forces may mean policies unnecessary
- Talk about the cost and benefits of intervention
- Talk about unintended consequences
- Talk about how efficient and effective policy is
- Talk about equality
- Talk about sustainability
What is government regulation? What are some examples?
Governments impose laws to regulate production, sale, purchase or consumption of a good or services
There are penalties for ignoring them and they are usually in markets with negative externalities
Examples: smoking bans, advertising regulations, minimum age laws, pollution permits, stating food contents, speed limits
What are the advantages of regulation?
- Encourages innovation for businesses
- Decreases production/consumption of negative externalities
- Sends clear message about behaviour it promotes
- Easy to understand e.g. age limits
- Fully in state control rather than demand which may be unresponsive
- Can gradually be toughened to stimulate capital investment
- Can be imposed quickly as laws unlike taxes and subsidies which take long times
What are the disadvantages of regulation?
- Opportunity cost of monitoring
- Producers ignore penalty if not enough
- Discourages small businesses and competition
- Hard to quantify externality and set penalty
- Government miss out on tax revenues
- Could cause hidden markets
- Prices rise
- NIMBY syndrome - people happy to support regulation as long as it does not effect them
What is minimum pricing?
Setting a floor price by the government, below at which a good cannot be sold at, discouraging consumption of a good and creating excess supply causing supply to fall.
May also be offset by inelastic demand as may not cause a significant reduction in demand if inelastic.
Most known is the minimum wage which reduces firms being able to underpay workers.
This can lead to unofficial markets developing due to scarcity of supply e.g. informal economy
What is maximum pricing?
Maximum prices are legally imposed maximum prices which suppliers cannot exceed to prevent prices rising too much. It is set below current equilibrium price
It creates a scarcity of supply and excess of demand as prices fall below equilibrium, leading to secondary markets developing
Examples may include energy price caps, rent controls, currency pegs, price capping for monopolies.
What is an example of maximum pricing?
In the rent market, people may be willing to pay much higher rents but rent controls are put in place preventing this
This may cause the landlord to lose incentive to maintain properties, leave the property market and reduce supply causing fewer properties in the market
Well intended policies prevent tenants being priced out of the housing market as don’t want to lose supply and worsen housing situation. By adding a maximum price less owners wish to make their properties available
What are arguments for and against minimum pricing?
For:
- Can reduce externalities
- Can cut deaths e.g. if minimum price set on alcohol/cigarettes
- Pubs benefit from higher minimum pricing
Against:
- Technically a tax
- Raise costs
- Other better policies e.g. actually taxing
- Demand may be inelastic
- Opportunity cost of enforcement
What is extension of property rights?
The Tragedy of the Commons relates to how self interested individuals mismanage communal resources so they are misallocated. By allocating legal ownership, markets can operate more efficiently as they are protected and regulated e.g. overfishing/overgrazed land.
What are the advantages of granting property rights?
- Economic agents own the land and protect what they benefit from
- Agents held accountable if causes issues for others
- Once granted no need for further intervention
- Owners may rent out the resource so market mechanism can ensure efficient use of resources
What are the disadvantages of granting property rights?
- Hard to fairly allocate rights which nobody owns e.g. rivers, skies etc.
- Other factors e.g. EU fishing
- Pollution and deforestation in one area effects other areas
- Hard to quantify cost of pollution
- May not know who caused the issue in an area
Issues:
-Overgrazing, deforestation, oil mining, acid rain, overfishing, global warming
What are pollution permits?
State decides the amount of CO2 emissions granted to firms, and polluters have to pay according to the amount they pollute through a carbon tax as a % of emissions.
Permits may be traded using the market mechanism to change prices and incentives of producers/consumers to reduce emissions
How do pollution permits work and what are the effects?
Usually are permitted 1 tonne without penalty and reduces emissions by allocating permits lower than current pollution levels to eventually let it drop.
Each polluter either decides to pollute less or pay more by buying more from others, deciding which is more beneficial and cheaper - this helps old industries who can’t quickly stop polluting
The higher the cost, the greater incentive to cut pollution. Increased scarcity of permits leads to rising price, so the cap is reduced over time to force up the price and reduce pollution
