F: Government intervention

Question 1

What can governments do to influence the allocation of resources?

Answer 1

1. Public expenditure
2. Taxation
3. Regulation
4. Price controls
5. Extension of property rights and pollution permits

Question 2

When the market fails to _____ this proivdes a case for government intervention beyond:
* Protecting property rights
* Upholding the rule of law
* maintaining value of the currency

Answer 2

When the market fails to **achieve an efficient or equitable allocation of resources **

Question 3

**labour immobility **
Give the consequence of the market failure and an example of government intervention

Answer 3

• Leads to structural unemployment (especially when occupational)
• State investment in education and training

Question 4

**Public goods **
Give the consequence of the market failure and an example of government intervention

Answer 4

• Failure of market to provide pure public goods, free rider problem
• government funded public goods for collective consumption

Question 5

**Negative externalities and demerit goods **
Give the consequence of the market failure and an example of government intervention

Answer 5

• Overconsumption of products that are bad for us / society
• information campaigns, minimum age for consumption, indirect taxes

Question 6

**Positive externalities and merit goods **
Give the consequence of the market failure and an example of government intervention

Answer 6

• Under consumption of products that are good for us/society
• Subsidies, better information on private benefits

Question 7

**Information gaps **
Give the consequence of the market failure and an example of government intervention

Answer 7

• Damaging consequences for consumers from poor choices
• statutory information or labelling

Question 8

**High relative property **
Give the consequence of the market failure and an example of government intervention

Answer 8

• Low income families suffer social exclusion, negative externalities
• Progressive Taxation and welfare to redistribute income and wealth

Question 9

*Monopoly power in a market *
Give the consequence of the market failure and an example of government intervention

Answer 9

• Higher prices for consumers cause loss of allocative efficiency
• competition policy measures to encourage new firms into a market

Question 10

model repeatable sentence

How do indirect taxes solve market failure ?

Answer 10

Indirect taxes can be used to raise the price of products with negative externalities designed to increase the opportunity cost of consumption and thereby shift the market equilibrium towards a socially optimal level. The imposition of an indirect tax will cause market supply to decrease

Question 11

model repeatable sentence

How do subsidies solve market failure?

Answer 11

Subsidies will lower the price of goods with positive externalities. They will boost consumption and output of products - remember that a subsidy causes an increase in market supply and leads to a lower equilibrium tax

Question 12

model repeatable sentence

How does tax relief solve market failure?

Answer 12

the government may offer financial assistance such as tax credits for business investment in research and development or a reduction in corportation tax (a tax on company profits) designed to promote new capital investment and extra employment

Question 13

What is our checklist for evaluating a government intervention?

Answer 13

1. Efficiency of a policy - does it lead to better use of scarce resources? Does it improve allocative, productive and dynamic efficiency?
2. Effectiveness of a policy - which policy is most liekly to meet a specific economic or social objective?
3. Equity effects of intervention - is it fair or is one group gaining more than another?
4. Sustainability of a policy - does the policy reduce the ability of future generations to engage in economic activity?
5. Does the policy need to be used along with something else?

Question 14

The aim of an indirect tax is to internalise an externality. How can we evaluate indirect taxes, i.e. what makes implementing them difficult ?

Answer 14

1. Setting the right tax rate
2. Cost of collection
3. Price inelastic demand
4. Redistribution effects
5. Increased costs - higher indirect taxes may cause inflation affecting consumers who did not create the externality and international competitiveness if taxes are higher in one country than another

Question 15

case study data : sugar tax

When was the levy on soft drinks announced and introduced in UK? Who was th chancellor at the time?

Answer 15

In 2016, George Osborne announced the levy on soft drinks and it was implemented in April 2018

Question 16

Arguments in favour of a sugar tax

Answer 16

1. Internalises the negative externalities in consumption
2. Information failures
3. Sugar tax raises revenue which can be hypothecated
4. Tax encourages drink manufactures to re-formulate their dirnks and offer healthier alternatives

Question 17

Arguments against a sugar tax

Answer 17

1. might be regressive on lower income families
2. other policies might be mroe effecive in cutting consumption
3. people might simply switch to other sugary products, i.e. the tax might be ineffecitve
4. risk of lost jobs in pubs and in shops that rely heavily on drink sales
5. risk of producers swapping low-calorie sweeteners for sugar but these could have other detrimental health effects

Question 18

Define subsidy

Answer 18

A goverment grant paid to producers to encourge increased production of certain goods or services

Question 19

what are some advantages of using subsidies?

Answer 19

• Subsidies on merit goods can increase their consumption bringing the equilibrium quantity closer to the social optimum, helping to internalise the external benefit
• subsidies reduce the price of a good making it more affordable for those n lowe rincomes , so reducing the effects of relative poverty

Question 20

What are some disadvantages of using subsidies?

Answer 20

1. it is extremely difficult in practice to place an accurate monetary value on the size of external benefits
2. funding for subsidies carries an opportunity cost
3. firms recieving subsidies may become reliant on them, encouraging productive inefficiency and laziness and reducing international competitiveness in the long run
4. subsidies for UK firms may be viewed by foreign governments as a form of artificial trade protection, encouraging them to retaliate by erecting their own forms of protection
5. if subsidies are placed on goods or services with inelastic demand, they may reduce price but not significantly increase consumption