Chapter 10 Flashcards
What is government intervention in markets
Where governments intervene in a market with the aim of correcting market failure
Government faliure
Misallocation of resources due to government intervention
Competition policy
Aims to encourage competition in a market
Legislation
Laws imposed, meaning action can be taken against those who break the legislation. Aims to prevent the supply of good
Regulation
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.
Tradeable pollution permits
Allow firms to emit a certain level of pollution, which will be capped
Buffer stock systems
Schemes used by government to stabilise prices and prevent shortages
Price Controls (minimum)
A price set above the price equilibrium (price floor)
Price Controls (Maximum)
A price set below the equilibrium (price ceiling)
Public/private partnerships
A private firm works with the government to provide a service (stagecoach)
Subsidies
A grant given by government to producers to encourage production of a good
Progressive tax
Takes a high percentage of tax from people with high incomes
Proportional tax
different income levels pay the same percentage of tax
Regressive
takes a higher percentage of tax with people with lower incomes
Direct Tax
A tax that a company or person pays directly, income tax
Indirect Tax
A tax levied on expenditure on goods or services
Pigovian
A tax that matches external cost
Specific Tax
A fixed tax levied whatever the price of the good, like 20£ for long haul flights
Benefits of Subsidies
- Helping poorer families with food and childcare costs particularly during an economic crisis
- Improved nutrition can lift labour productivity and reduce the long-term burden on health services
- Encourage output and investment in fledgling sectors such as life sciences and renewable energy
- Protect jobs in loss-making industries hit by recession and by external economic shocks
- Improve housing and transport affordability to improve geographical mobility of labour
- Reduce the cost of training & employing workers
- Encourage the arts and other cultural services which have social benefits
Disadvantages of Subsidies
- Producers can become “subsidy dependent” - such as farmers
- Subsidies can distort resource allocation
- Subsidies can lead to excess production / surpluses
- Environmental risks from excessive production
- Government failure arising from political lobbying
Subsidies can be very expensive - taxpayers bear the cost
Pros of maximum prices
- 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
Negtives of max prices
- 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.
Minimum prices are for what type of good
Demerit (cigs)
Maximum prices are for what type of good
Merit (fruit)
Benefits of tradable pollution permits
They incentivise companies to be more efficient
Negatives of tradeable pollution permits
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
What does the maximum price mean
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.
What does the minimum price mean
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
Maximum price definition for essays
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.
Problems with Pollution permits
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
Where has Pollution permits been used
Sulpher Trading Scheme:
In the 1990s US introduced a sulpher trading scheme to reduce their sulpher dioxide emissions
Information provision
By providing information governments can ensure there is no information failure such as university debt in UK,
What does the effectiveness of legislation depend on
- The perceived punishment for breaking the law
- The chance of being caught
- The costs of enforcement
What does the effectiveness of buffer stocks depend on
- 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
What is information provision
act of informing the public about the true nature of a product or market
Examples of government failure
- 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
Causes of Government Failure
- Estimating the extent of government failure
- the cost of intervention
- policy agendas
- lack of a profit incentive
- moral hazard
Consequences of government failure
- maybe less spending elsewhere ie education
- ## may cause firms to leave the market –> loss of industry
What is the principal-agent problem
we define owners as principals and managers as agents. Potential disagreements over the objectives of the firm
Evaluation of a firms business objectives:
- 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
