4.1.8.9 Government intervention in markets Flashcards
Why do governments intervene in markets?
To correct market failures (externalities, missing markets, inequality).
Examples: Healthcare provision (merit good), carbon taxes (negative externality).
How do indirect taxes correct market failure?
Types:
- Ad valorem (e.g., VAT at 20%).
- Specific (e.g., fuel duty at 58p/litre).
Effect: Raises price of demerit goods (e.g., cigarettes) → reduces consumption.
Diagram: MPC shifts left to equal MSC.
How does PED affect tax burden?
Inelastic demand (e.g., cigarettes): Consumers bear most of tax.
Elastic demand: Producers absorb more of tax.
How do subsidies work? Give an example.
Government payments to lower production costs.
Example: Recycling subsidies → positive externalities.
Diagram: Supply shifts right → price falls, quantity rises.
Compare max/min prices with examples.
Maximum price (e.g., rent controls): Set below equilibrium to protect consumers.
Minimum price (e.g., alcohol/min wage): Set above equilibrium to protect producers/workers.
How do tradable pollution permits work?
Firms allowed fixed pollution quota; can trade unused permits.
Pros: Encourages green tech; raises revenue.
Cons: Monitoring costs; may drive firms abroad (‘carbon leakage’).
Why does the state provide public goods?
Free-rider problem prevents private provision (e.g., streetlights).
Examples: NHS (healthcare), state schools.
Evaluate government regulation.
Pros: Bans harmful goods (e.g., asbestos); ensures safety.
Cons: High enforcement costs; black markets may emerge.
How does reducing information gaps help?
Examples:
- Cigarette packaging warnings.
- Mandatory car history reports.
Prevents asymmetric information (e.g., used car market).
When can intervention worsen outcomes?
Regulatory capture (e.g., energy regulators favoring firms).
Unintended consequences: Price caps → shortages (e.g., Venezuela).
Give a UK example of successful intervention.
Sugar tax (2018): Reduced sugary drink sales by 10% → addressed obesity externality.
How does this link to market structures?
Monopoly regulation: Price caps to prevent exploitation.
Competitive markets: Subsidies to correct underproduction.
