Chapter 19 & 20: Government Intervention and Failure

Question 1

Why is government intervention necessary?

Answer 1

• To support firms
• To correct market failure
• To promote equity
• To support low-income households
• To collect government revenue

Question 2

Explain how and why governments collect revenue

Answer 2

Governments need money to provide essential services, public and merit goods. Revenue is raised through taxation, sale of licenses, sale of goods/services and privatization.

Question 3

Explain how and why governments correct market failure.

Answer 3

In many markets, there is a less than optimal allocation of resources from society’s point of view. In maximizing their self-interest, firms and individuals will not self-correct this allocation and governments need to do so. They influence the level of production or consumption.

Question 4

Explain why governments promote equity.

Answer 4

To reduce the opportunity gap between the rich and poor.

Question 5

Explain why governments support firms.

Answer 5

To help them remain competitive in a global economy

Question 6

Explain why governments support low-income households.

Answer 6

Poverty has multiple impacts on both the individual and the economy - intervention seeks to redistribute the income (tax the rich and give to the poor) so as to reduce the impact of poverty

Question 7

What are the most common methods of government intervention?

Answer 7

• Indirect taxation
• Use of subsidies
• Maximum prices and minimum prices
• Tradable pollution permits
• Extension of property rights (creating laws to protect property such as ideas, songs, etc.)
• State provision (when a nationalized industry is the main provider of a good/service)
• Regulation (rules/directives of a government)
• Provision of information