Chapter 10: Government intervention and government failure Flashcards
When do markets fail?
When the price mechanism causes an inefficient allocation of resources within a society
When may market failure occur?
When the price is not set equal to marginal cost, or where marginal social benefit is not equal to the marginal social cost
What is market failure often viewed as?
A valid reason for governments to intervene in the economy
Define indirect tax
A tax levied on expenditure on goods or services
Define direct tax
A tax charged directly to an individual based on a component of income
Name a way that governments raise revenue
The imposition of taxes
What is value-added tax?
Levied on a wide range of goods and services
What are direct taxes charged on the basis of?
Income received by economic agents
Draw a diagram illustrating the effects of an indirect tax on cigarettes
Figure 10.1
What does the PED determine?
The incidence of the tax
Draw a diagram to illustrate a tax on pollution
Figure 10.3
Define polluter pays principle
An argument that a firm causing pollution should be charged the full external cost that it inflicts on society
What are subsidies used to encourage?
Producers to increase their output of particular goods
Where are subsidies especially common?
Agriculture
Draw a diagram illustrating the effects of a subsidy
Figure 10.4
Draw a diagram illustrating the effect of subsidizing museums
Figure 10.5
Who are the benefits of the subsidy shared by?
The buyers and the sellers
Name 2 ways to correct some forms of market failure
- Taxes
2. Subsidies
What may be used in the case of merit goods
Subsidies
What may be used in the case of demerit goods
Indirect taxes
Define contracting out
A situation in which the public sector places activities in the hands of a private firm and pays for the provision
Define competitive tendering
A process by which the public sector calls for private firms to bid for a contract for provision of a good or service
Define public-private partnership
An arrangement by which a government service or private business venture is funded and operated through a partnership of government and the private sector
Define private finance initiative
A funding arrangement under which the private sector designs, builds, finances and operates an asset and associated services for the public sector in return for an annual payment linked to its performance in delivering the service
Name 2 things the government need to undertake expenditure on
Administration and in enabling transfer payments to the vulnerable
Why does the government need to intervene in public goods?
As they cannot be met through the free market
Draw a diagram illustrating a maximum price
Figure 10.6
Draw a diagram illustrating the minimum price
Figure 10.7
Give an example of the maximum price
Housing market
Give an example of minimum price
Alcohol
When may prices exhibit volatility over time
In some commodity prices
Draw a diagram to illustrate buffer stock
Figure 10.8
Define buffer stock
A scheme intended to stabilize the price of a commodity by buying excess supply in periods when supply is high and selling when supply is low
What does legislation do?
Prevent the supply of a good
What does regulation do?
Limit the supply without banning it altogether and in some cases to encourage more of a good to be supplied
How does legislation operate?
By declaring some goods illegal
What’s competition policy
A form of regulation used to protect consumers from being exploited by firms that have market power
What does the CMA do?
Investigates mergers and anticompetitive practices in markets
Name 5 main functions of the CMA
- Investigating mergers that could potentially give rise to a substantial lessening of competition
- Assessing particular markets in which there are suspected competition problems
- Antitrust enforcement by investigating possible breaches of UK or EU prohibitions against anti-competitive agreements and abuse of a dominant position
- Criminal cartels - the CMA is able to bring criminal proceedings against individuals who commit the cartel offense
- Consumer protection
When is a merger subject to investigation by the CMA
If the firms involved in the proposed merger or acquisition have a combined market share in the UK of more than 25% and if the combined assets of the firms exceed £70 million worldwide
How has the state sometimes intervened?
Through the direct control of prices
What effect may rent controls have?
Reducing the amount of accommodation available
What is competition policy a form of?
A regulation used to protect consumers
Define pollution permit system
A system for controlling pollution based on a market for permits that allow firms to pollute up to a limit
What’s the problem with using a tax to tackle pollution
It may be difficult to quantify the size of the tax needed to reduce pollution to a desirable level or to identify the main culprit firms that are causing the problem
Advantages of tradable pollution permits (2)
- They have an incentive to produce less pollution
- The overall level of pollution can be controlled by this system as the authorities control the total amount of permits that are issued
Disadvantages of tradable pollution permits
- Enforcement - sanctions must be in place for firms that pollute beyond the permitted level
- It may not be a straightforward exercise for the authorities to decide upon the appropriate number of permits to issue in order to produce the desired reduction in emission levels
- The very different levels of pollution produced by different firms may seem inequitable
What can be effective in curbing the effects of externalities?
The allocation of property rights
What can market failure arise from?
Information failure
Evaluation of government intervention and government failure (3)
- There must be stability in the political system if firms and consumers are to take decisions with confidence about the future
- There must be a secure system of property rights without which markets could not be expected to work
- If government does not put sufficient resources into road maintenance, or the development the rail network, then firms may face higher costs and be disadvantaged relative to their international competitors
Define government failure
A misallocation of resources arising from government intervention that causes a less efficient allocation fo resources and imposes a welfare loss on society
How can information failure be tackled?
By ensuring that economic agents have access to the information they need
When may government failure occur
When well-meaning intervention by governments has unintended effects
