3. GOVERNMENT MICROECONOMIC INTERVENTION Flashcards
Market failure
When free market does not make the best use of scarce resources
Situations where market failure occurs
Lack of public goods
Overconsumption of demerit gods
Underprovision of merit goods
Reasons for lack of public goods
In free market = private firms = aim is profit maximisation
Public goods- free rider problem, non excludable non rivalrous, no payment
No profit motives to supply public goods
Gov intervention on public goods
Direct provision
Gov intervention on demerit goods
Taxes, indirect tax to increase price and discourage consumption
Regulations like age restrictions, fines, healthwarnings
Gov intervention on merit goods
Subsidies
Financial support to encourage production
Reduces price for consumers
Direct provision
Information provision
Reasons for price control
Stabilise prices
Ensure affordability
Prevent excessive pricing
Maximum price (price ceiling)
Legal price that is below equilibrium price meaning producers cannot charge higher than certain price
Advantages of maximum price
Increased affordability
Consumer welfare
- protects consumers from excessive pricings
Encourage consumption, may lead to economic growth
Disadvantage of maximum price
Shortages as prices are low, demand > supply
Creation of black markets as shortages occur
Long waiting list, consumer dissatisfaction
Minimum price (price floors)
Legal price set above the equilibirum price to protect producers
Advantages of minimum price
Fair income for producers esp in industries where it is unpredictable/ volatile eg farmers
Prevents exploitation of labour (minimum wage)
discourage demerit good consumption
Disadvantages of minimum price
Surplus -> waste, increase price, producers will supply more but consumers less willing to buy
Reduce efficiency
- artificially maintaining high price reduce incentives for producers
Indirect tax
Tax imposed on goods & services rather than income
Impact of indirect tax on price & quantity
Increases price
- taxes increase cost of production, higher price for consumers
- used to reduce demerit good consumption
Impact of indirect tax on market effects & revenue
Indirect tax generates gov revenue
- can use for funding of public goods
helps correct negative externalities
- reduce consumption of demerit goods
Impact of subsidies on price & quantity
Lowers price for consumers
Encourage consumption for merit goods
Supports producers
Buffer stock schemes
Gov intervention to stabilise prices of commodities during periods of surplus and release stock during shortages
Objectives of buffer stock
Price stability
Income support for producers
Maintain supply reserve during periods of low supply
Disadvantages of buffer stock
Risk of excess supply - waste
High cost to purchase, store and maintain stock before having to release
Gini coefficient
Measure of income/ wealth inequality, ranging from 0 to 1
Gini = 1
Perfect inequality
Gini = 0
Perfect equality
Policies to redistribute income/ wealth
Minimum wage
Transfer payments
Progressive tax
