Government Intervention Flashcards
State provision
The government pays for goods/services through tax revenues, then offers them to the public for free
State provision advantages
-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
State provision disadvantages
-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
Regulation
Setting rules that firms must comply with. These rules are set by the government to try and correct market failures
Deregulation
Loosening regulations
Disadvantages of deregulation
-customers are no longer protected from the anti competitive behaviour of firms and might lose out
Benefits of deregulation
-the allocation of resources will improve as the government will reduce their interference with the free market
Benefits of regulation
-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
Costs of regulation
-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
Taxes
Sums of money paid to the government
Direct taxes
On income or wealth
Indirect taxes
On consumption
Specific taxes
Paid per unit, they increase the cost of production by the tax amount on each unit and lead to a decrease in supply
Burden of a tax
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
Taxation advantages
-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
Disadvantages of taxation
-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
Subsidies
Money paid by the government to keep the price of products low
Subsidy advantages
-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
Disadvantages of subsidies
-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
Maximum price
Policy to increase consumption levels of a good.
Maximum price disadvantage
-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
Minimum price
Can be used to correct failures that happen under monopsony power
Minimum price disadvantage
If the minimum price is above equilibrium, excess supply
If the minimum price is below equilibrium, no change
Pros of maximum price
-Protects consumers from exploitation
-could make sure firms are more efficient by forcing them to pay more attention to costs
