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OCR A-Level Economics > 2.11 - Government intervention > Flashcards

2.11 - Government intervention Flashcards

1
Q

In a market based economy, what does a consumer’s ability to consume goods and services depend on?

A

Their income and wealth.

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2
Q

What might happen if a consumer has a low income?

A

They may not be able to afford basic goods to satisfy their needs.

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3
Q

What may be used to encourage the consumption of merit goods?

A

Subsidies or free state provision, for things such as education.

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4
Q

What may be used to discourage consumption of demerit goods?

A

Taxes or bans may be used to make demerit goods less accessible or less easy to consume.

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5
Q

What are 3 government objectives when implementing policies?

A

Improving information.
Efficiency.
Focus on small/medium businesses.

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6
Q

What is the purpose of governments?

A

They aim to improve the wellbeing of their citizens.

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7
Q

How do governments try to encourage citizens to make rational choices?

A

They try to reduce the asymmetry of information - by giving consumers as much information as possible about the choices they make.

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8
Q

What is an example of the government trying to reduce the asymmetry of information?

A

Mandatory nutritional information on food packaging.

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9
Q

Why do some industries benefit from nationalisation?

A

Some industries do not function well under the price mechanism. Furthermore some industries, like train tracks or Network Rail, may be natural monopolies and could benefit from nationalisation.

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10
Q

What is nationalisation?

A

The transfer of a major branch of industry from private to state ownership or control.

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11
Q

What does the UK competition policy look for?

A

Anti-competitive play in the market.

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12
Q

What are 4 examples of sources of anti-competitive play?

A

Monopolies, mergers, cartels and financial support.

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13
Q

What does CMA stand for?

A

Competition and Markets Authority

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14
Q

What can the CMA do if it believes a firm has become to powerful?

A

The CMA can force the break up of firms which have become too powerful in a market.

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15
Q

What can the CMA do if they believe a firm is abusing its monopoly power?

A

If they believe a firm is abusing its monopoly power it can force the firm to split or sell some of its assets to increase competition. However, it is rare to break up firms which have gained power through internal growth.

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16
Q

How can the power of monopolies be reduced?

A

The power of these monopolies can be reduced by regulation.

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17
Q

What is an example of a regulation?

A

The introduction of a price ceiling by the government restricts the amount firms can raise their prices. Reducing the potential losses in efficiency.

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18
Q

What could the price ceiling either be?

A

The price ceiling could be either: inflation minus real price, or inflation minus real price plus investment.

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19
Q

Why do monopolies usually want to be avoided by the government?

A

Monopolies formed through mergers or agreements can often be inefficient. This means they can artificially inflate the price for no reason.

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20
Q

How does the government prevent monopolies from forming?

A

It can block mergers. The UK government investigates all mergers which results in a firm having greater than 25% market share. (which is a legal monopoly)

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21
Q

Why do governments encourage competition?

A

They do this because it leads to lower prices, higher quality goods and services and improvements in technology - all of which lead to an increase in welfare.

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22
Q

How does an increase in technology help society?

A

Firms’ investment in technology leads to positive spill over effects as the technology is shared through an economy. Each technological breakthrough pushes society further forward and again leads to improved welfare.

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23
Q

How are lower prices helpful?

A

If there is competition in the production of goods and services, it means firms have to make their products more attractive to consumers than their competitors in order to sell them. Lower prices results in households being able to afford to consume more leading to improved welfare.

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24
Q

How is competition cause quality improvements?

A

Firms don’t just compete over price. Consumers will choose goods which are higher quality because they bring them more utility and improved welfare.

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25
Q

How can contestability be improved in a market?

A

It can be improved through deregulation.

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26
Q

How can deregulation increase competition?

A

This is because barriers to entry have been lowered.

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27
Q

Why do regulators need power?

A

They need power so companies and heads of companies need to be discouraged from engaging in price-fixing or joining an illegal cartel.

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28
Q

Why does a government need trustworthy information?

A

If the information received is trustworthy, governments can take action and punish anti-competitive behaviour. This will help to improve efficiency and the allocation of resources.

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29
Q

What is regulation?

A

It involves setting rules that firms must comply with.

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30
Q

What is regulation’s purpose and who sets it?

A

Regulation tries to correct market failures, and is imposed by the government.

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31
Q

What can regulation control?

A

Regulation can control monopolies and stop them from taking advantage of customers and reducing welfare.

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32
Q

What does legislation provide?

A

Legislation provides a means of punishing firms for their anti-competitive behaviour.

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33
Q

How can the environment be protected?

A

By utilising regulation.

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34
Q

What can happen as a result of deregulation?

A

Customers are no longer protected from the anti-competitive behaviour of firms and might lose out.

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35
Q

What are the benefits of deregulation?

A

The allocation of resources will improve as the government will reduce their interference with the free market. By reducing the bureaucracy associated with legislation, efficiency will improve.

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36
Q

What are the drawbacks of regulation?

A

It can be expensive to monitor firms to enforce regulation, and there is an opportunity cost attached to this. It can be expensive to follow regulations. Some firms may end up closing down or relocating because of high costs.

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37
Q

How does the government provide state provisions?

A

The government either provides state provisions itself (e.g. state education) or provides free goods or services to the public that it’s bought from the private sector (e.g. private health services offered free to NHS patients).

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38
Q

How can the government afford to provide the goods/services?

A

Uses tax revenues.

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39
Q

What are 3 examples of state provision?

A

The National Health Service (NHS).
Police service.
Secondary school education.

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40
Q

What are the advantages of state provision?

A

State provision can reduce inequality by redistributing money from the wealthy to the poor. This is something the market doesn’t always do. Without state provision, some services might not exist as they aren’t profitable.

41
Q

How is what the government does/doesn’t provide determined?

A

Value judgements need to be made about what the state can and can’t provide well.

42
Q

What are the disadvantages of state provision?

A

Without a drive for profit, there is less incentive to make a service as efficient as possible. The economic incentives for efficiency could be eroded. There is an opportunity cost of providing one service over another. With asymmetric information, there is a risk of government failure.

43
Q

What is privatisation?

A

Privatisation sees publicly owned firms/industries become privately owned firms/industries.

44
Q

Why might governments privatise?

A

Governments may privatise to boost competition.

45
Q

What is a PPP?

A

Public Private Partnership.

46
Q

Give an example of a PPP:

A

Hospitals are often leased to the government by private firms which own the building

47
Q

What are the advantages of privatisation?

A

The incentive for profit means that resources will be allocated more efficiently. When the government sell off their enterprise, they will gain revenue that can be put to alternative use.

48
Q

What are the disadvantages of privatisation?

A

The drive for efficiency means that an element of humanity might be lost. Efficiency may come in the way of delivering a fair service. There is a moral argument against providing some services profitably. Safety and spending on safety measures may be worse in privatised industry that are judged only on profits.

49
Q

What is “contracting out” something?

A

Governments contract out the provision of various services. The government then pays for the contract and distributes as if it had been publicly provided.

50
Q

Why would the government “contract out”?

A

By contracting certain jobs out, the government can get jobs done by specialist firms who service other customers and benefit from economies of scale.

51
Q

What is tendering?

A

Tendering is a competitive process with firms giving their best offers in order to win contracts.

52
Q

What is a drawback of tendering?

A

However, because the tendering process is based on what firms promise they can deliver, it is common for firms to over promise and under provide which can lead to large unexpected costs and reduced quality.

53
Q

Where does the funding come from for PPP’s?

A

Funding comes from a combination of government payments and the firm being given the rights to earn money from this, on completion.

54
Q

What happens if there are shortfalls between initial costs and the government grant in a PPP?

A

Public Finance Initiatives raise money through selling bonds to banks and investors.

55
Q

What are taxes?

A

Taxes are sums of money paid to the government.

56
Q

What are direct taxes?

A

Direct taxes are taxes on income or wealth.

57
Q

What are indirect taxes?

A

Indirect taxes are on consumption.

58
Q

What are specific taxes?

A

Specific taxes are paid per unit.

59
Q

What do specific taxes do to the costs of production?

A

They increase the cost of production by the tax amount on each unit and leads to a decrease in supply.

60
Q

How is the value of a tax seen using 2 supply curves?

A

The vertical distance between the supply curves represents the the value of the tax. This shifts the supply curve only because a duty doesn’t change the consumers’ reservation prices but does affect the producers’ positions.

61
Q

What is an example of specific tax?

A

An example of a specific tax would be fuel duty, in the UK there is a tax of 58p per litre on the consumption of petrol.

62
Q

What are Ad Valorem taxes?

A

Ad Valorem taxes are based on the value of the good being sold. They increase the price by a fixed percentage.

63
Q

What is an example of an Ad Valorem tax in the UK?

A

VAT is an example of an Ad Valorem tax, in the UK most goods and services have 20% tax applied to them.

64
Q

What happens to the supply curve as a result of an Ad Valorem tax?

A

The supply curve pivots to the left because, although the tax still represents an additional cost to the producer, the size of this increases further up the supply curve, where the price (and so tax) is higher.

65
Q

What is the burden of a tax?

A

When a tax is imposed, the producer may pass on some of this cost to the consumer in the form of a higher price.

66
Q

How is the proportion of the tax burden passed onto the consumer determined?

A

The proportion of the tax passed onto the consumer depends on the elasticity of demand. The more inelastic the demand, the more of a tax is passed on and less ‘absorbed’.

67
Q

What are the advantages of taxes?

A

Taxes could help fund government expenditure which could include correcting the adverse effects of the goods they are taxing. Taxing demerit goods can lead to consumers choosing less damaging substitutes.

68
Q

What are the disadvantages of taxes?

A

Taxes can lead to an increase in inequality. For example, taxes on alcohol and cigarettes are regressive, because they take up a disproportionate amount of poor people’s income.

69
Q

What can happen if a tax is set too low?

A

The market failure remains.

70
Q

What can happen if a tax is set too high?

A

It could reduce competitiveness of firms and over-correct market failure.

71
Q

What do governments need to implement taxes correctly?

A

They need very good information.

72
Q

How are cigarettes a market failure?

A

People are unaware of the negative impact of cigarettes on their health. The negative externalities of smoking are not considered by consumers. People may not be rational (they may be myopic or short-termist).

73
Q

What does an indirect tax do to the cost of production?

A

It raises the cost of production.

74
Q

What does an indirect tax do to the supply curve of a good/service?

A

It shifts the supply curve towards a more socially optimal level.

75
Q

What are the two types of indirect tax?

A

Specific or ad valorem.

76
Q

What does a specific tax do to a good’s supply curve?

A

It causes a parallel shift in the supply curve.

77
Q

What does an ad valorem tax do to a good’s supply curve?

A

It causes a non parallel shift in the supply curve.

78
Q

What do subsidies do?

A

Governments pay producers subsidies to help keep the price of products low.

79
Q

How can subsidies help to correct market failure?

A

Subsidies can correct market failure by encouraging the consumption and production of a good with positive externalities.

80
Q

What does a subsidy do to a supply curve?

A

The curve shifts to the right, towards a more socially optimal level.

81
Q

What are the advantages of subsidies?

A

Subsidies can reduce the cost of a product and allow a firm to exploit economies of scale. This will improve long-run efficiency and competitiveness abroad. Consumer preferences may change as a result of a subsidy.

82
Q

What are the disadvantages of subsidies?

A

Subsidies may encourage laziness from producers because they do not need to be as efficient. There is also an opportunity cost to a subsidy. Elasticity of demand determines how effective a subsidy is. Subsidised goods may be of a lower standard than alternatives they’re trying to replace.

83
Q

What determines how much of an indirect tax is passed on to consumers?

A

The elasticity of demand for that good/service.

84
Q

The more inelastic demand is, the …….. of an indirect tax is passed on to consumers.

A

more

85
Q

What does imposing a tax on a good do to the market equillibrium?

A

It shifts it left, so there is a lower quantity of output and a higher price.

86
Q

Where does the burden of tax lie when demand is inelastic?

A

If demand is inelastic, then consumers bear the whole burden of an indirect tax.

87
Q

Where does the burden of tax lie when demand is elastic?

A

If demand is elastic, then producers bear the whole burden of an indirect tax.

88
Q

What is the purpose of trade pollution permits?

A

Trade pollution permits are allocated to businesses in an attempt to control pollution levels.

89
Q

What are the benefits of trade pollution permits?

A

This system can put a cap on the level of pollution. The lower the pollution of a firm, the more they can benefit. This encourages firms to lower their pollution levels. Governments make revenue.

90
Q

What are the disadvantages of trade pollution permits?

A

There is a cost to implementing the scheme. Deciding on the level of pollution is difficult. The market for permits is subject to failure also.

91
Q

How do governments set optimal limits on pollution?

A

By allocating permits to firms.

92
Q

How are these permits traded?

A

These permits can be traded through the price mechanism.

93
Q

How does the EU’s emissions trading system (ETS) incentivise firms to reduce emissions?

A

The ETS annually cuts the number of permits. This incentivises firms to reduce emissions because they may be forced to buy more permits for not doing so.

94
Q

What is the CAP?

A

The Common Agricultural Policy.

95
Q

When was it introduced, and by who?

A

1962, by the EU to support farmers across Europe.

96
Q

What was the CAP aiming to address?

A

It was addressing the market failures of EU farmed goods being an under consumed merit good.

97
Q

What were the market failures it was trying to correct?

A

To encourage environmentally sustainable farming (reducing negative externalities). Encouraging farmers to take care of the country side (public good/tragedy of the commons).

98
Q

What are the benefits of CAP?

A

EU farmers have benefited from the CAP as they have found it easier to earn a living by producing goods in a way that entitles them to the subsidy. By effectively lowering the cost of production it has led to lower prices for farmed foods. It has encouraged more environmentally sustainable farming practices and encouraged the protection of the countryside.

99
Q

What are the disadvantages of CAP?

A

The CAP is hugely expensive, costing around 40% of the EU’s total budget, roughly £50bn in 2017. By paying fixed amounts for certain crops, it has led to overproduction of these crops, resulting in huge stockpiles which can spoil and go to waste if not sold. Also, with only certain crops subsidised, it has occasionally led to a shortages of other crops and led to worsening inequality between those farmers who do and those don’t produce subsidised crops.

OCR A-Level Economics (14 decks)

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