5.8 Government intervention in markets Flashcards
Why do government intervene in markets? (3)
- Correct any market failure
- Achieve a more equitable distribution of income and wealth
- Achieve the government’s macroeconomic objectives for the economy
Why do governments intervene in order to eliminate market failure? (5)
- Reduce or eliminate negative externalities
- Increase or maximise positive externalities
- Increase the supply of merit goods
- Reduce the supply of demerit goods
- Supply public goods that would be undersupplied by the market
Why do governments intervene in order to reduce inequalities in the distribution of income and wealth? (3)
- Unequal distribution can lead to poverty
- Tensions in society can be created
- A breakdown in society can cause further market failure
Why do governments intervene in order to support UK industry? (3)
- Full employment is a government target
- Certain industries are more important than others as they employ large amounts of labour
- Infrastructure is essential if business are to provide quality services
How do governments influence the allocation of resources? (3)
- Regulation
- Public expenditure
- Taxation and subsidies
What ways in which governments can intervene to correct market failure? (5)
- Indirect taxation
- Subsidies
- Price controls
- State provision
- Regulation
What are the two types of tax the government can use to alter supply?
Specific or unit tax - these involve a fixed amount being added per unit of a good or service
Ad valorem taxes - adding a percentage to of the price of a good or service VAT at 20%
What are the advantages of indirect taxation? (3)
- Inelastic demand - high revenues can be gained, can be redistributed to healthcare
- Assuming the tax rate is correct it should internalise an external cost - reflecting a negative impact upon price and quantity
- Use of price mechanism leaves it up to producers and consumers to adjust their behaviour
What are the disadvantages of indirect taxation? (4)
- Inelastic demand - Qd doesn’t fall much unless tax is extremely high - reduces the impact of the tax
- Can’t accurately place a monetary value on external costs, makes it almost impossible to internalise a negative externality.
- Regressive in nature - take a larger percentage of poorer persons income - seen as unfair
- Reduce international competitiveness due to increased costs compared to foreign competitors
What are subsidies?
Subsidies are government grants paid to producers to encourage increased production of certain goods or services
What are the advantages of the government providing subsidies? (2)
- Can increase consumption of merit goods, bringing the eqm quantity closer to the social optimum, helping to internalise the external benefit
- Reduces the price of a good, making it more affordable for those on lower incomes, so reducing the effects of relative poverty
What are the disadvantages of the government providing subsidies? (5)
- It is difficult to place an accurate monetary value on the size of external benefits
- Opportunity cost - could be used elsewhere
- Firms can become reliant on them, encouraging productive inefficiency and laziness
- UK subsidies may be viewed by foreign governments as trade protection - meaning they may retaliate by using their own forms of protection
- If used on good with inelastic demand, they may reduce price but not significantly increase consumption
What are price floors?
Minimum prices are price floors that the prices are not allowed to fall below
This goes against what we think it is ABOVE the equilibrium level and NOT BELOW
What are the advantages of price floors? (3)
- Guarantees a minimum price and income - helps generate a reasonable standard of living
- Encourages production of essential products
- Excess supplies may be bought up and stored, to be released in times of future shortage
What are the disadvantages to price floors? (3)
- Consumers must pay a higher price, reducing their disposable income.
- Can cause over-production, an inefficient use of resources. (Excess supply)
- Opportunity costs of purchasing excess supplies.
- Reduces international competitiveness if price above those of foreign competitors.
