8.9 Goverment Intervention In Markets

Question 1

What are the different schools of thought about the government should intervene in the economy?

Answer 1

-free-market economists
-interventionist economists

Question 2

What do free market economists believe about gov intervention

Answer 2

Shouldn’t happen, should be left to the market as it will make a market failure worse

Question 3

What do interventionist economists believe about government intervention?

Answer 3

It is necessary to correct market failure and it can make markets work better

Question 4

Why do free-market economists think intervention is not needed?

Answer 4

The market mechanism working through incentives transmitted through price signals achieves a more optimal outcome than can be achieved in gov intervention

-risk taking business people know more than civil servants on risk fee salaries

Question 5

Why do interventionist economists believe intervention is needed?

Answer 5

Markets are too often uncompetitive (characterised by monopoly power and producer sovereignty) and are prone to market failure

-the gov has more info than the unregulated market and can counter destabilising forces achieving a better outcome than if it was left to market forces

Question 6

What is producer sovereignty?

Answer 6

when firms have the power and ability to influence consumer decisions

Question 7

What is the most extreme thing the government can do to correct market failures?

Answer 7

Abolish the market and create a command or planning mechanism financed through taxation

Question 8

What is a command or planning mechanism?

Answer 8

occurs when the government controls all major aspects of the economy and economic production

Question 9

What is the smallest government intervention that can occur?(opposite to command mechanism)

Answer 9

Influence market by providing information and nudging firms and consumers to behave in certain ways

Question 10

What are nudges?

Answer 10

Factors which encourage people to think and act in certain ways

(Try and shift behaviour to comply with desirable social norms)

Question 11

What government intervention would occur between the two extremes?

Answer 11

-regulations to limit people’s freedom of action in the market place
-use taxes, subsides, price ceilings and price floors to alter prices in the market and change incentives and economic behaviour

Question 12

Why would markets fail to provide pure public goods such as the armed forces and police?

Answer 12

The free-rider problem

Question 13

How do governments provide pure public goods?

Answer 13

Through general taxation

Question 14

How can governments intervene and increase consumption of merit goods?

Answer 14

Regulation to change their prices and provide subsidies to encourage production and consumption

Question 15

How can regulation force consumers to do things?

Answer 15

By law e.g wearing a seatbelt in a car

Question 16

How much subsides does education receive in the UK?

Answer 16

It is completely subsidised

Question 17

How can the government force firms and consumers to generate positive externalities?

Answer 17

Impose regulations that force firms to generate positive externalities and local authorities can by law require households to maintain the appearance of properties

(Illegal not to provide positive externalities in this case)

Question 18

What are the two ways the gov can intervene to try and correct marker failures caused by negative externalities?

Answer 18

-quantity controls and regulation

-taxation

Question 19

Why would governments allow some demerit goods to be legal and some not to?
(Heroin is illegal but burning coal is not)

Answer 19

In the case of coal it can be impossible to produce electricity without burning some amount of coal. Banning the burning of coal would limit production and effect the economy

Quantity controls would be more appropriate

Question 20

In the case of burning coal what quantity controls exist?

Answer 20

Max emission limits
-restricts on time of day it is burnt

Question 21

In recent years government has reduced regulations and instead used _____ to limit the consumption of demerit goods

Answer 21

Taxes

Question 22

What is a tax?

Answer 22

Compulsory fee imposed by gov to pay for activities. Can be used for objectives such as to reduce the consumption of demerit goods

Question 23

Why is the gov preferring tax to regulation?

Answer 23

It provides a market-oriented solution to the problems posed by negative externalities and demerit goods

Question 24

How is a tax calculated ?

Answer 24

Gov measures the value of the negative externality the goods produces

Question 25

What does a tax do to the prouder of a negative externality or demerit good?

Answer 25

Decreases incentive to produce less of the product

Question 26

What specifically improved the resource allocation in the economy (tax wise)

Answer 26

Setting the tax so the price the consumer pays is equal the social cost of producing another unit

Question 27

What are the negatives associated with creating a tax(pollution tax for e.g)?

Answer 27

Introduced new inefficiencies and distortions to market associate with the costs of collecting tax and incentive to illegally avoid paying the tax

Question 28

What does a tax do to a supply curve of a demerit goof

Answer 28

Shifts it to the right

Question 29

Why are demerit goods extremely inelastic in their demand

Answer 29

Because they are really addictive

Question 30

What is the downside of a high rate of tax?

Answer 30

Lead to smuggling and black market activity as consumers look for cheaper alternatives

Question 31

What are the two most common ways to deal with the problem of pollution?

Answer 31

Regulation
Taxation

Question 32

What does a permit still involve?

Answer 32

Regulation

Question 33

Why are pollution permits a good idea?

Answer 33

-energy companies are able to reduce pollution by more than the law requires and sell their space permits to other power stations

Question 34

How does permits work for pollution?

Answer 34

Imposes max limits power stations are able to emit and gradually decreases it by about 5% year on year

Question 35

What is a the price ceiling?

Answer 35

A price above which it is illegal to trade.

They can distort markets by creating excess demand

(When price ceiling is below equilibrium)

Question 36

Diagram for price ceiling below equilibrium price?

Answer 36

Question 37

How do pride ceilings(below the equilibrium price) interfere with the price mechanism?

Answer 37

Market can’t raise price to get rid of excess demand

Households ration by quantity intend of price (long waiting lists)-also changes the incentive function of prices as ceilings prevent prices rising and attracting new firms to the market

Question 38

What is an price floor?

Answer 38

A price below which it is illegal to trade.

(Can distort markets by creating excess supply)

Question 39

To affect a market where must the price floor be set?

Answer 39

Above the equilibrium price

Question 40

Diagram for a price floor set above free market wage in the labour market

Answer 40

-excess supply of labour from L1 to L2

Question 41

What is the extend of unemployment in this diagram?

Answer 41

From L1 to L2

Question 42

What does a price floor above the free market wage encourage rouge employers to do?

Answer 42

Break the law e.g paying poverty wages to vulnerable workers such as illegal immigrants

Question 43

What is the effect of a price ceiling above the fee market wage/price ?(unemployment)

Answer 43

Nothing

Question 44

What is the effect of a price floor below the free market wage/price?(unemployment)

Answer 44

Nothing

Question 45

Why can price floors interfere with the incentive function of prices?

Answer 45

Falling prices causes inefficient high cost firms to leave the market and a price floor prevents this from happening