20-Government Intervention In Market Flashcards
State The Methods of Government Intervention in Market
–> Indirect tax
–> Subsidies
–> Maximum Price
–> Minimum Price
–> Minimum Guaranteed Price
–> Regulations
–> Tradable Pollution Permits
–> State Provision
Elaborate The Method of Government Intervention in Market
–> Indirect tax
It will Increase the Cost of Production and Shift the Supply Curve to Left thus Increasing price this discourages Production & Consumption of good that generated External Cost
The Tax Funds raised by Govt can be used to Clean up the Environment
Elaborate The Method of Government Intervention in Market
–> Subsidies
Its a Grant Provided by Govt to Producer to Reduce Cost of Production. This will Reduce Price and Increases Supply. This Encourages Production and Consumption of a good.
Elaborate The Method of Government Intervention in Market
–> Maximum Price
Its a price Ceiling set by Govt above which Price Amount Cannot be charged
It is to Protect Consumers from being Charged very High Prices for Necessities (Gas & Electricity)
Consumer Surplus will rise for those being Charged a Lower Price
Producer Surplus will fall and it may also reduce total Revenue and Profit for the firms
There will be a shortage of Supply due to MAX Price and Some firms may leave the Market increasing the shortage in the Future. This will Increase Unemployment and Lower Consumer Choice
It may create Govt failure as Hidden Markets may develop as people may be Prepared to Pay More to Ensure they Obtain it
Elaborate The Method of Government Intervention in Market
–> Minimum Price
Its a Price Floor set by Govt below which Goods Cannot be Sold
It is set to Discourage Consumption of a good or to Encourage the production of a good
Elaborate The Method of Government Intervention in Market
–> Minimum Guaranteed Price
Under a Minimum Guaranteed Price Scheme the Govt sets a price Floor below which goods cannot be Sold, Govt Agency will Purchase any Surplus at this Minimum Price.
This Encourages Production to Increase Output as they know in advance that they will receive a Certain Price no matter how much they Produced
Such Schemes will Reduce Price Fluctuation and lead to a more Stable Income for Producers and Improve their Living Standards, Greater Certainty will lead to more Investment into New Production and Creates more Employment.
Elaborate The Method of Government Intervention in Market
–> Regulations
These are Rules or Laws Used to Influence
They Include Rules that are set by Govt to control the production of goods that create External Costs, This will Reduce Supply and cause Prices of goods to rise. A higher Price will reduce the quantity Consumed and Lower External Cost
Those Firms who break the Regulations will be charged with Fines.
Elaborate The Method of Government Intervention in Market
–> Tradable Pollution Permits
It is an Allowance on the amount of pollution firms may Emit which can be Bought and Sold in the Market
It encourages Firms to Pollute Below their Limits as they can Sell Surplus Permits and make Profits
The High Polluters will buy more Permits, Higher Prices of Permits Increases the Cost of Polluting and Encourages Firms to Invest in Cleaner Technology to Reduce their Pollution
This will Lower Production Closer to the Social Optimum Level of Output, Quantity of Pollution Falls Lowering External Costs
Prices of Permits determined by the Market Forces of Demand and Supply
Pollution be Slowly Reduced by Reducing the number of Permits Issued each Year, Govt can Raise Funds by Selling Some Permits
The Revenue can be used to Subsidize Cleaner Technology and Protect Environment
Elaborate The Method of Government Intervention in Market
–> State Provision
Its when Govt directly provides a good Funded through Tax Revenue. Eg- Education, Healthcare, Public Good
Govt provide Healthcare, Primary and Secondary Education for Free or at a low charge. It Reduces the Problem of Under Construction or Production of Goods with Positive Externalities, When people Underestimate the Benefits of Consuming a good
It ensures Provision for all including those on Low Incomes who would not be able to afford the good
Govt Directly provides Public goods and Reduces the problem of Under Provision of Public goods, This is because Private Sector doesnt Provide them as they are Unprofitable due to Free Rider Problem.
