Gov intervention in markets

Question 1

Main reasons for gov intervention

Answer 1

• correct market failure.
• achieve a fairer distribution of income and wealth.
• achieve gov’s macro objectives for economy.

Question 2

type of gov intervention

2 types of indirect tax

Answer 2

• Specific or unit taxes.
• Ad valorem taxes

Question 3

Indirect tax

Specific or unit taxes

Answer 3

a fixed amount being added per unit of a good or service, e.g. bottles of alcohol.

Question 4

Indirect tax

Ad valorem taxes

Answer 4

adding a percentage of the price of good or service, e.g. VAT 20%

Question 5

type of gov intervention

Why use indirect tax to intervene?

Answer 5

Alter supply of certain goods, they increase costs of firms = supply curve shifts leftwards.

Question 6

Indirect tax

Advantages

Answer 6

• often placed on goods with inelastic demand = strong tax rev generated for gov to be used for spending.
• use of price mechanism = up to consumers to decide how to adjust behaviour.
• assuming gov’s applied right tax levels = tax helps internalise an external cost e.g. to reflect more accurate impact of neg ex.

Question 7

indirect tax

Disadvantages

Answer 7

• often placed on inelastic goods = demand may not fall unless tax is large ∴ ineffective tax.
• difficult to place accurate monetary value on external costs ∴ almost impossible to internalise an external cost.
• they take a larger percentage of poorer persons income = unfair.
• UK firms international competitiveness may be reduced by imposition of tax = increases production costs compared to comp.

Question 8

type of gov intervention

Subsidy

Answer 8

payment made to producers to encourage increased production of a good or service.

Question 9

type of gov intervention

Why are subsidies used?

Answer 9

to encourage increased production of certain goods services, and increase consumption.
also to promote use of products that reduce external costs.
= shift supply curve to the right

Question 10

subsidies

advantages

Answer 10

• on merit goods = increase consumption, bringing equilibrum closer to social optimum, helping internalise the external benefit.
• reduce price of a good = more affordable for low income households = reduced effects of relative poverty.

Question 11

subsidies

disadvantages

Answer 11

• difficult to place monetary value on size of external benefits.
• to fund - carries opportunity cost.
• firms who recieve may become reliant on them, encouraging ineffectiveness laziness + reduce international competativeness in LR.
• If placed on good with inelastic demand, may reduce price but not significantly increase consumption.

Question 12

type of gov intervention

minimum prices

Answer 12

a price floor placed above the free market equilibrum price.
a min price set above free market equilbibrum = create excess supply.

Question 13

min prices

advantages

Answer 13

• give producers garenteed min price and income = helps generate reasonable standard of living.
• encourages production of essential products.
• excess supplys may be brought up and stored, be released in times of future shortage.

Question 14

min prices

disadvantages

Answer 14

• consumers pay higher price = reduced disposable income.
• encorages over-production = inefficent use of resources, excess S = storage = extra costs.
• reduced international competativeness if price raised above foreign competitors.
• in case of tobacco or alchol, may seek cheaper, harmful alternatives leading to gov failure.

Question 15

type of gov intervention

max prices

Answer 15

a price ceiling above which prices are not permitted to rise.
use = free market equilibrum price be too high for consumers, leading to problems of reduced affordabilty.
impact = max price set below free market price - create excess D.

Question 16

max prices

advantages

Answer 16

• w/out = some wouldn’t be able to afford certain goods e.g. prescription meds, therefore promotes greater equality.
• can reduce ability of firms with monopoly power to exploit consumers through charging higher prices.

Question 17

max prices

disadvantages

Answer 17

• some people who want a good or service, will not be able to obtain it, leading to dissatifaction and fustration.
• creation of excess D implies queues, shortages and wait lists - in cases like healthcare can have serious implications.
• may lead to establishment of black markets, such as secondary markets for music and sporting event tickets.

Question 18

type of gov intervention

direct provision

Answer 18

if viewed that provision of a service/good cannot be left to free market at all (may be provided in insufficient ot excessive quantities - gov will organise the provision of it.
* generally the goods/services will be free or nearly free ‘at the point of consumption’ e.g. state school, medical treatment.

Question 19

type of gov intervention

regualtions

Answer 19

rules or laws used to control/restrict actions of econ agents in order to reduce market failure.
if firms don’t adhere to the rules, may be punished e.g. fines, limits on trade activity, imprisionment.

Question 20

type of gov intervention

types of regulations used to tackle market failure.

Answer 20

• banning smoking in public areas.
• min legal age to drink.
• max emission levels on new cars.
• noise threasholds for airports in urban areas.
• set up relatory bodies

Question 21

Correcting infomation failure

Market Intervention due to Information Gap

Answer 21

Governments intervene in markets when consumers lack information about goods/services, causing over or under consumption due to a lack of understanding about their effects.

Question 22

Government Methods to Address Information Failure

Answer 22

Governments utilize various methods to rectify information failure, impacting the demand for goods/services.
Examples include
1. compulsory food labeling,
2. health warnings on cigarettes,
3. TV campaigns against alcohol abuse
4. publication of school/hospital performance tables.

Question 23

Correcting infomation failure

Merit and Demerit Goods in Free Markets

Answer 23

• Merit goods (under-consumed) lack consumption in free markets due to consumers’ limited knowledge about their long-term benefits.
• Demerit goods (over-consumed) suffer from excessive usage due to consumers’ lack of awareness about associated issues.

Question 24

Correcting infomation failure

Drawbacks of Government Interventions

Answer 24

• High costs of advertising campaigns raise questions about their effectiveness in changing consumer behavior, especially when competing against adept marketing strategies of private companies bombarding consumers with information.

Question 25

Correcting infomation failure

Effectiveness Challenges of Government Actions

Answer 25

The effectiveness of government actions to counter information failure is debated. Their impact on consumer behavior amid a flood of information might be overshadowed by the marketing prowess of private entities, questioning the government’s ability to create meaningful change.