2) State Provision - MB Flashcards
what is government expenditure/ state provision?
is where the government decides which goods or services to provide and then spends money providing them
what are examples of state provision/government expenditure? (list 4)
- NHS (healthcare)
- State Education
- Prisons
- Waste Disposal
governments use… to pay for certain goods and services so that they are… when consumed
- tax revenue
- free or a very low price
who provides public goods?
must be provided by the state
what are merit goods?
could be provided by the state or subsidised
State provision means the funding comes from…
the government
state provision means the funding comes from the government and the goods/services is provided by: (list 2)
1) the government
2) private companies
why is there government expenditure/ state provision? (list 4)
a) increase the consumption of merit goods
b) ensure that public goods are produced/consumed
c) reduce inequality of access due to (lack of) wealth
d) redistribute income
the correct level of state provision can be a … judgement
value judgement
Diagram, analysis merits goods A:
what happens to the supply curve when there is government expenditure? (where the government organises the production of a good or service)
shifts the supply curve to the right from S0 to S1
Diagram, analysis merits goods A:
what happens to the price and quantity when there is government expenditure?
- this lowers the free market price of P0 to an almost free level of P2
- and consequently the quantity consumed increases from Q0 to Q1
Diagram, analysis merits goods A:
what shows government spending, what does this mean?
- to meet the increased quantity demanded at this lower price would require the government to spend P1-P2 per unit
Diagram, analysis merits goods A:
In reality, how does the decrease in price for consumers and increase in quantity demanded (from government expenditure) affect the government’s decisions?
- in reality , this may be unaffordable
- instead of providing Q1, the government may accept a shortage, and this means consumers must wait until they receive their good or service
Diagram, analysis merits goods B:
why is there a shift in demand to the right, D0=MPB to D1= MSB?
the act of state provision acts as a signal, changing consumers tastes and preferences shifting D0= MPB right to D1=MSB
Diagram, analysis merits goods B:
what does a shift to the right of D0= MPB to D1=MSB cause in terms of quantity?
there is an increase in the quantity consumed from Q0-Q1
Diagram, analysis merits goods B:
why does the government want the quantity consumed to rise?
to increase the welfare gain to society - consumers will benefit from the positive externalities accruing from increased consumption
Diagram, analysis merits goods B:
how would the government create allocative efficiency from government expenditure?
- if the government ensures that the price is sufficiently low, and production sufficiently higher that there is no shortage, the social optimum level of consumption may be achieved
- achieving allocative efficiency where MSB=MSC
Diagram, analysis merits goods B:
is it bad if state provision does not attain the social optimum level of output?
state provision may ensure that society is closer than if left to the free market
what is the benefit of the state provision of public goods?
it ensures that the guides are provided and consumed at all, often leading to supply-side effects
(there is no diagram as it is not up to the free market)
what are the 2 advantages of state provision/government expenditure?
1) reduces inequality
2) may support macro objectives
how does state provision/ government expenditure reduce inequality?
all citizens gain access to the same, high quality, level of service regardless of income level. This effectively redistributes income
how may state provision/ government expenditure support macro objectives?
many merit or public goods have a supply side effect of making the labour force more productive by improving the quantity or quality of labour
what are the disadvantages of state provision/ government expenditure ? (list 4)
1) Expensive for government - opportunity cost is high
2) No market disciplining producers - missing markets
3) Encourages dependence
4) Reduces innovation
how is state provision/ government expenditure expensive for the government?
- opportunity cost is high
- state provision, with no shortage, may be prohibitively expensive
how does state provision/ government expenditure lead to no market discipline producers (missing markets)?
producers may have higher costs than necessary
how does state provision/ government expenditure encourage dependence?
consumers may rely on the state rather than fixing simple problems
how could state provision/ government expenditure reduce innovation?
the free market more quickly changes to meet the needs of consumers than government - there is no “invisible hand” as there is no monetary incentive
how does government expenditure compare favourably to subsidy? (2 things)
1) subsidy cannot lead to the provision of public goods, whereas state provision can
2) state provision increases equality more than subsidy
how does government expenditure compare unfavourably to subsidy? (2 things)
1) state provision is more expensive as the consumer contributes nothing, or very little, to the cost of provision
2) non market- based solution may encourage lack of discipline among providers, leading to higher costs and lower quality and/or less innovation
