4. government intervention

Question 1

indirect taxation

Answer 1

put on goods with negative externalities to reduce supply, increase price and therefore increase welfare

Question 2

cons of indirect taxation

Answer 2

-difficult to know the size of the externality so difficult to target the tax
-leads to black markets
-if good is inelastic, output will hardly change
-politically unpopular
-they are regressive (increase inequality)

Question 3

pros of indirect taxation

Answer 3

-increased welfare
-raises government revenue

Question 4

subsidies

Answer 4

put on goods with positive externalities so supply rises, price falls and there is a rise in welfare. can also be used to fix information gaps

Question 5

cons of subsidies

Answer 5

-high opportunity costs
-difficult to target
-producers could become inefficient

Question 6

pros of subsidies

Answer 6

-welfare maximised
-can have positive impacts

Question 7

maximum and minimum pricing

Answer 7

max pricing must be below equilibrium and min pricing must be above. they are used to control the output and supply of goods with positive and negative externalities

Question 8

cons of maximum and minimum pricing

Answer 8

-distortion of price signals and can lead to excess supply/demand
-difficult for government to know where to set prices
-both can lead to the creation of back markets

Question 9

pros of maximum and minimum pricing

Answer 9

-max pricing makes goods more affordable
-min pricing will ensure producers get a fair price

Question 10

application for max and min pricing

Answer 10

Scotland, min price for alcohol reduced binge drinking. it was set for the cheapest drinks but had some negative impacts on poverty and those who are addicted

Question 11

trade pollution permits

Answer 11

allows the owner to pollute up to a specific amount of pollution and the government controls how many permits there are so limits the max amount of pollution

Question 12

cons of traceable pollution permits

Answer 12

-expensive to monitor
-raise business costs
-difficult to know how many permits to allow

Question 13

pros of traceable pollution permits

Answer 13

-fall in pollution
-increased government revenue
-encourages green technology

Question 14

cons of state provision of public goods

Answer 14

-expensive with a high opportunity cost
-no market involvement so they could produce the wrong combination of goods
-government could be inefficient

Question 15

pros of state provision of public goods

Answer 15

-corrects market failure
-brings out inequality by ensuring everyone has access
-benefits of the goods

Question 16

pros of state provision of information

Answer 16

-helps consumers act rationally
-best if government use it alongside other policies

Question 17

cons of state provision of information

Answer 17

-can be expensive
-government could lack information
-consumers may not listen

Question 18

regulation

Answer 18

impose laws and caps to ensure that levels are set to where MSB=MSC or ensure companies provide consumers with all information

Question 19

cons of regulation

Answer 19

-expensive to monitor
-regulatory capture
-firms may pass on costs
-excessive regulation could reduce competition

Question 20

pros of regulation

Answer 20

-consideration for externalities
-prevent exploitation of customers
-keeps consumers fully informed (overcomes market failure)

Question 21

government failure

Answer 21

when government intervention in the market leads to a net loss of welfare and a misallocate of resources

Question 22

how does government failure causes a distortion of prices

Answer 22

some intervention can distort signals and the free market mechanism like minimum and maximum pricing leading to excess supply and demand

Question 23

government failure and information gaps

Answer 23

government do not have all the information they may need

Question 24

government failure and excessive administration costs

Answer 24

expenditure goes on administration instead of the actual intended good/service