Government Intervention

Question 1

State provision

Answer 1

The government pays for goods/services through tax revenues, then offers them to the public for free

Question 2

State provision advantages

Answer 2

-Can reduce inequality by redistributing money from the wealthy to the poor
-without state provision some services might now exist as they are not profitable eg some train routes that aren’t profitable do not exist

Question 3

State provision disadvantages

Answer 3

-the economic incentives for efficiency could be eroded, without a drive for profit.
-there is an opportunity cost of providing one service over another
-with assymetric info there is a risk of gov failure

Question 4

Regulation

Answer 4

Setting rules that firms must comply with. These rules are set by the government to try and correct market failures

Question 5

Deregulation

Answer 5

Loosening regulations

Question 6

Disadvantages of deregulation

Answer 6

-customers are no longer protected from the anti competitive behaviour of firms and might lose out

Question 7

Benefits of deregulation

Answer 7

-the allocation of resources will improve as the government will reduce their interference with the free market

Question 8

Benefits of regulation

Answer 8

-Regulation can correct market failures that arise from externalities eg can be imposed to limit level of pollution firms make
-can control monopolies and stop them from taking advantage of customers and reducing welfare
-legislation provides a means of punishing firms for anti-competitive behaviour
-can be used to protect the environment

Question 9

Costs of regulation

Answer 9

-hard to know which industries to regulate, and how to regulate them. This often needs a value judgement
-it can be expensive to monitor firms to enforce regulation, opportunity cost
-can be expensive to follow regulations, some firms may shut down or relocate

Question 10

Taxes

Answer 10

Sums of money paid to the government

Question 11

Direct taxes

Answer 11

On income or wealth

Question 12

Indirect taxes

Answer 12

On consumption

Question 13

Specific taxes

Answer 13

Paid per unit, they increase the cost of production by the tax amount on each unit and lead to a decrease in supply

Question 14

Burden of a tax

Answer 14

When a tax is imposed, the producer may pass on some of this cost to the consumer in the form of a higher price and absorb the rest. The proportion of the tax passed onto the consumer depends on the elasticity of demand

Question 15

Taxation advantages

Answer 15

-could help fund government expenditure which could include correcting the adverse effects of the goods they are taxing
-taxing demerit goods can lead to consumers choosing less damaging substitutes

Question 16

Disadvantages of taxation

Answer 16

-can lead to an increase in inequality by taking up disproportionate amount of poor people’s income
-if a tax is set too low market failure remains
-if a tax is set too high then it could reduce competitiveness of firms and over-correct market failure. Governments need very good information to implement taxes correctly

Question 17

Subsidies

Answer 17

Money paid by the government to keep the price of products low

Question 18

Subsidy advantages

Answer 18

-Can reduce the cost of a product and allow a firm to exploit economies of scale, will improve long run efficiency and competitiveness abroad
-consumer preferences may change as a result of a subsidy

Question 19

Disadvantages of subsidies

Answer 19

-may encourage laziness from producers as they do not need to be as efficient
-opportunity cost
-elasticity of demand determines how effective subsidy is
-subsidised hood may be of a lower standard than alternatives they’re trying to replace

Question 20

Maximum price

Answer 20

Policy to increase consumption levels of a good.

Question 21

Maximum price disadvantage

Answer 21

-If the maximum price is above the equilibrium it will have no effect
-if the maximum price is below the equilibrium, excess demand. More people can afford it but less people can have it as supply is restricted
-this might lead to the good being sold in a black market

Question 22

Minimum price

Answer 22

Can be used to correct failures that happen under monopsony power

Question 23

Minimum price disadvantage

Answer 23

If the minimum price is above equilibrium, excess supply
If the minimum price is below equilibrium, no change

Question 24

Pros of maximum price

Answer 24

-Protects consumers from exploitation
-could make sure firms are more efficient by forcing them to pay more attention to costs

Question 25

Cons of maximum price

Answer 25

-could deter firms from entering the market
-could limit investment into the industry as the amount of profit available is limited
-firms could cut costs too aggressively in an attempt to boost profit, leading to poor quality goods

Question 26

Pros of minimum price

Answer 26

By having a minimum price, suppliers can get a reasonable price for their goods

Question 27

Cons of minimum price

Answer 27

-consumers will be paying more for their goods
-resources are wasted when excess goods are destroyed
-resources are allocated in inefficiently could have been used elsewhere rather than creating excess supply
-potential high opportunity cost because governments could spend on other schemes

Question 28

Government failure

Answer 28

The unintended worsening allocation of resources as a consequence of a policy the government has implemented to correct a market failure. Produces a net welfare lost

Question 29

Administrative costs

Answer 29

Resources are needed to implement government intervention. If the cost is too high, the intervention may not be worthwhile

Question 30

Inadequate or imperfect information

Answer 30

Limits the governments ability to critically assess market failures and possible solutions. So the right decision isn’t always made and government failure can arise