8.9 - government intervention in markets Flashcards
What are the main reasons against government intervention in markets?
price mechanisms in competitive markets can achieve a better outcome than Gov intervention. government plays at maintaining law and order, providing public goods and some merit goods. Wealth creating firms will help the markets to function with minimum regulation
What are the main reasons for government intervention in markets?
they believe that markets are uncompetitive due to monopoly power and there is too much producer sovereignty, and other market failures. the government should intervene as they ‘know better’ than producers
How can the government correct market failures?
- abolish market (most extreme)
- provision of public goods and merit goods
- force firms and consumers to generate positive externalities
- negative externalities/demerit goods
- regulation and correction of market failure
- taxation and correction of market failure
- price ceilings/max price laws
- price floors/min price laws
-pollution permits
How does the provision of public goods fix market failures?
if there is a need for public goods, the gov steps in; discourages the production and consumption of negative externalities.
what doers the government do to create positive externalities?
they can change the prices of merit goods and other goods which yield external benefits
What is an example of a public good provided by the government?
education - it is compulsory and completely subsidised from 2015 for children aged 5-18. low income families could not afford to send their children to school without this.
How does the government force firms and consumers to generate positive externalities?
impose regulations such as bylaws that require households to maintain the appearance of properties
how does the government get rid of negative externalities and demerit goods?
they can regulate or tax
how is regulation used to correct market failure?
there could be compulsory consumption - where consumers are forced to pay and consume something such as fluorine in water
how does regulation correct market failure?
directly influences the quantity of the externality that a firm or household can generate (thus the level of demerit good)
why might banning an externality (regulation) be difficult?
because banning an externality completely may prevent the production of a good (e.g. electricity)
what can be used instead of banning an externality?
use a quantity control (i.e. a maximum emission)
what is a tax?
compulsory levy imposed by the government to pay for its activities. Taxes can also be used to achieve other objectives, such as reduced consumption of demerit goods
what is a market replacement?
where something is completely banned instead of just making a market adjustment
in the past would governments typically tax or regulate?
they would regulate, but recently, they have chosen to tax others more (especially through environmental taxes such as congestion fees)
what is the polluter must pay principle?
where the gov calculates the monetary value of the negative externality (in this case the pollution) and imposes it on firms
what does the pollution tax do?
acts as an incentive to pollute less, to avoid paying more tax.
who is the tax pushed onto?
consumers
what does pushing the tax onto consumers mean?
if tax is set to the price the consumer pays equal to the social cost of producing another unit of the good (ie marginal social cost) resource allocation is improved
how can taxes distort the market?
people try to avoid illegally
What are pollution permits?
market orientated solution where the government collects taxes for people polluting the air.
what type of solution are pollution permits?
market orientated
how do pollution permits work?
sets a maximum limit on the amount of pollution that coal burning power stations are allowed to emit
how do tradable pollution permits work?
companies that are able to reduce pollution by more than the law requires, can pass the excess permits onto other firms
