2) State Provision - MB

Question 1

what is government expenditure/ state provision?

Answer 1

is where the government decides which goods or services to provide and then spends money providing them

Question 2

what are examples of state provision/government expenditure? (list 4)

Answer 2

• NHS (healthcare)
• State Education
• Prisons
• Waste Disposal

Question 3

governments use… to pay for certain goods and services so that they are… when consumed

Answer 3

• tax revenue
• free or a very low price

Question 4

who provides public goods?

Answer 4

must be provided by the state

Question 5

what are merit goods?

Answer 5

could be provided by the state or subsidised

Question 6

State provision means the funding comes from…

Answer 6

the government

Question 7

state provision means the funding comes from the government and the goods/services is provided by: (list 2)

Answer 7

1) the government
2) private companies

Question 8

why is there government expenditure/ state provision? (list 4)

Answer 8

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

Question 9

the correct level of state provision can be a … judgement

Answer 9

value judgement

Question 10

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)

Answer 10

shifts the supply curve to the right from S0 to S1

Question 11

Diagram, analysis merits goods A:

what happens to the price and quantity when there is government expenditure?

Answer 11

• 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

Question 12

Diagram, analysis merits goods A:

what shows government spending, what does this mean?

Answer 12

• to meet the increased quantity demanded at this lower price would require the government to spend P1-P2 per unit

Question 13

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?

Answer 13

• 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

Question 14

Diagram, analysis merits goods B:

why is there a shift in demand to the right, D0=MPB to D1= MSB?

Answer 14

the act of state provision acts as a signal, changing consumers tastes and preferences shifting D0= MPB right to D1=MSB

Question 15

Diagram, analysis merits goods B:

what does a shift to the right of D0= MPB to D1=MSB cause in terms of quantity?

Answer 15

there is an increase in the quantity consumed from Q0-Q1

Question 16

Diagram, analysis merits goods B:

why does the government want the quantity consumed to rise?

Answer 16

to increase the welfare gain to society - consumers will benefit from the positive externalities accruing from increased consumption

Question 17

Diagram, analysis merits goods B:

how would the government create allocative efficiency from government expenditure?

Answer 17

• 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

Question 18

Diagram, analysis merits goods B:

is it bad if state provision does not attain the social optimum level of output?

Answer 18

state provision may ensure that society is closer than if left to the free market

Question 19

what is the benefit of the state provision of public goods?

Answer 19

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)

Question 20

what are the 2 advantages of state provision/government expenditure?

Answer 20

1) reduces inequality
2) may support macro objectives

Question 21

how does state provision/ government expenditure reduce inequality?

Answer 21

all citizens gain access to the same, high quality, level of service regardless of income level. This effectively redistributes income

Question 22

how may state provision/ government expenditure support macro objectives?

Answer 22

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

Question 23

what are the disadvantages of state provision/ government expenditure ? (list 4)

Answer 23

1) Expensive for government - opportunity cost is high
2) No market disciplining producers - missing markets
3) Encourages dependence
4) Reduces innovation

Question 24

how is state provision/ government expenditure expensive for the government?

Answer 24

• opportunity cost is high
• state provision, with no shortage, may be prohibitively expensive

Question 25

how does state provision/ government expenditure lead to no market discipline producers (missing markets)?

Answer 25

producers may have higher costs than necessary

Question 26

how does state provision/ government expenditure encourage dependence?

Answer 26

consumers may rely on the state rather than fixing simple problems

Question 27

how could state provision/ government expenditure reduce innovation?

Answer 27

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

Question 28

how does government expenditure compare favourably to subsidy? (2 things)

Answer 28

1) subsidy cannot lead to the provision of public goods, whereas state provision can

2) state provision increases equality more than subsidy

Question 29

how does government expenditure compare unfavourably to subsidy? (2 things)

Answer 29

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