Chapter 10

Question 1

What is government intervention in markets

Answer 1

Where governments intervene in a market with the aim of correcting market failure

Question 2

Government faliure

Answer 2

Misallocation of resources due to government intervention

Question 3

Competition policy

Answer 3

Aims to encourage competition in a market

Question 4

Legislation

Answer 4

Laws imposed, meaning action can be taken against those who break the legislation. Aims to prevent the supply of good

Question 5

Regulation

Answer 5

Rules to control/reduce negative behaviour by consumers and producers that are enforced by legislation. To limit the supply the of a good without banning it.

Question 6

Tradeable pollution permits

Answer 6

Allow firms to emit a certain level of pollution, which will be capped

Question 7

Buffer stock systems

Answer 7

Schemes used by government to stabilise prices and prevent shortages

Question 8

Price Controls (minimum)

Answer 8

A price set above the price equilibrium (price floor)

Question 9

Price Controls (Maximum)

Answer 9

A price set below the equilibrium (price ceiling)

Question 10

Public/private partnerships

Answer 10

A private firm works with the government to provide a service (stagecoach)

Question 11

Subsidies

Answer 11

A grant given by government to producers to encourage production of a good

Question 12

Progressive tax

Answer 12

Takes a high percentage of tax from people with high incomes

Question 13

Proportional tax

Answer 13

different income levels pay the same percentage of tax

Question 14

Regressive

Answer 14

takes a higher percentage of tax with people with lower incomes

Question 15

Direct Tax

Answer 15

A tax that a company or person pays directly, income tax

Question 16

Indirect Tax

Answer 16

A tax levied on expenditure on goods or services

Question 17

Pigovian

Answer 17

A tax that matches external cost

Question 18

Specific Tax

Answer 18

A fixed tax levied whatever the price of the good, like 20£ for long haul flights

Question 19

Benefits of Subsidies

Answer 19

1. Helping poorer families with food and childcare costs particularly during an economic crisis​
2. Improved nutrition can lift labour productivity and reduce the long-term burden on health services​
3. Encourage output and investment in fledgling sectors such as life sciences and renewable energy​
4. Protect jobs in loss-making industries hit by recession and by external economic shocks​
5. Improve housing and transport affordability to improve geographical mobility of labour​
6. Reduce the cost of training & employing workers​
7. Encourage the arts and other cultural services which have social benefits​

Question 20

Disadvantages of Subsidies

Answer 20

8. Producers can become “subsidy dependent”​ - such as farmers
9. Subsidies can distort resource allocation​
10. Subsidies can lead to excess production / surpluses​
11. Environmental risks from excessive production​
12. Government failure arising from political lobbying​
    Subsidies can be very expensive - taxpayers bear the cost​

Question 21

Pros of maximum prices

Answer 21

• The advantage is that they will lead to lower prices for consumers.​
• This may be important if the supplier has monopoly power to exploit consumers. For example, a landlord who owns all the property in an area can charge excessive prices. Maximum prices are a method to bring prices closer to a ‘fair’ and ‘competitive equilibrium.​
• Maximum prices are usually reserved for socially important goods, such as food and rent.​
  *Could lead to government failure if the government misjudge the optimum market price

Question 22

Negtives of max prices

Answer 22

• The disadvantage is that it will lead to lower supply. If firms get a lower price, there may be less incentive to supply the good, and the number of properties on the market declines.​
• A maximum price will also lead to a shortage – where demand will exceed supply; this leads to waiting lists. In housing it could lead to a rise in homelessness.​
• A maximum price can lead to the emergence of black markets as people try to overcome the shortage of the good and pay well above the market price.​

Question 23

Minimum prices are for what type of good

Answer 23

Demerit (cigs)

Question 24

Maximum prices are for what type of good

Answer 24

Merit (fruit)

Question 25

Benefits of tradable pollution permits

Answer 25

They incentivise companies to be more efficient

Question 26

Negatives of tradeable pollution permits

Answer 26

They are only effective if the government enforces them. Firms may relocate where they pollute without limits which would reduce their production costs.
Firms might pass the higher costs on to consumers
Competition might be restricted
Expensive to monitor emissions and admin costs

Question 27

What does the maximum price mean

Answer 27

The government might set a maximum price where the consumption or production of a good is to be encouraged. This is so the good does not become too expensive to consume. An example of a product that will have a maximum price would be fruits.

Question 28

What does the minimum price mean

Answer 28

The government might set a minimum price where the§ consumption or production of a good is to be discouraged. This ensures the good never falls below a certain price

Question 29

Maximum price definition for essays

Answer 29

A maximum price occurs when a government sets a legal limit on the price of a good or service – with the aim of reducing prices below the market equilibrium price. For example, the government may set a maximum price of bread of £1 – or a maximum price of a weekly rent of £150. Whereas the equilibrium price might actually be £2.50 for bread and £ for rent 200.

Question 30

Problems with Pollution permits

Answer 30

It’s hard to know how many pollutions permits to give out, as we don’t know how much pollution is already being polluted. Knowing, where to start, is hard. There are high admin costs of implementing the scheme. High-income countries can continue to pollute as they can afford to purchase the permits while developing countries cannot which stops their development. People plant trees to offset their emissions “carbon offsetting” instead of fixing their pollution issues

Question 31

Where has Pollution permits been used

Answer 31

Sulpher Trading Scheme:
In the 1990s US introduced a sulpher trading scheme to reduce their sulpher dioxide emissions

Question 32

Information provision

Answer 32

By providing information governments can ensure there is no information failure such as university debt in UK,

Question 33

What does the effectiveness of legislation depend on

Answer 33

• The perceived punishment for breaking the law
• The chance of being caught
• The costs of enforcement

Question 34

What does the effectiveness of buffer stocks depend on

Answer 34

• The product must be able to be stored
• If the price ceiling and price floor are set correctly
• The costs of storage must be added

Question 35

What is information provision

Answer 35

act of informing the public about the true nature of a product or market

Question 36

Examples of government failure

Answer 36

• information provision that does not lead to a change in behaviour
• taxation that does not disincentivise people from consuming a product
• government expenditure that does not lead to an increase in supply

Question 37

Causes of Government Failure

Answer 37

• Estimating the extent of government failure
• the cost of intervention
• policy agendas
• lack of a profit incentive
• moral hazard

Question 38

Consequences of government failure

Answer 38

• maybe less spending elsewhere ie education
• ## may cause firms to leave the market –> loss of industry

Question 39

What is the principal-agent problem

Answer 39

we define owners as principals and managers as agents. Potential disagreements over the objectives of the firm

Question 40

Evaluation of a firms business objectives:

Answer 40

• what stage is a business at
• some firms are set up solely to benefit (Bill and Melinda Gates Foundation)
• time scale and state of the economy