Government Intervention

Question 1

how might gov intervene?

Answer 1

Gov intervene to ensure the market considers the external costs and benefits.

• indirect taxes & subsides
• tradable pollution permits
• provision of the good
• provision of information
• regulation

Question 2

What are indirect taxes and the impact on supply?

Answer 2

A tax levied on a good/ service
- they increase production costs for producers - supply less
- this increases market price and demand contracts

Question 3

What are the two types of indirect taxes?

Answer 3

• Ad Valorem taxes (percentages added to the total price)
• specific taxes (set tax per unit)

Question 4

Reasons for gov intervention in markets?

Answer 4

• correct market failure
• support firms
• promote equity
• support poorer households
• collect gov revenue

Question 5

What is a subsidy?

Answer 5

A subsidy is a payment from the gov to a producer to lower their costs of production and encourage production.
(Encourage production of merit goods)

Question 6

What are the disadvantages of subsidy?

Answer 6

• The opportunity costs to the government and potential higher taxes. (To raise revenue up again)
• Firms potentially becoming inefficient if they rely on the subsidy
• gov failure if they subsidise less efficient industries.

Question 7

Effect of subsidy on the supply curve?

Answer 7

Shifts supply curve left - more merit goods produced - price falls

Question 8

What is a maximum price?

Answer 8

A price set below the market equilibrium price by the gov.

Question 9

Why might maximum price be set?

Answer 9

Where the consumption/ production of a good is to be encouraged (stops the price from going too high)

Question 10

Disadvantages of maximum prices.

Answer 10

• could lead to gov failure if they misjudge where the optimum market price should be
• it could reduce firms profits which in the long run could have been invested (however, producers may raise other good prices so consumers would have no net gain)
• black markets could emerge
• shortage is created

Question 11

Advantage of maximum prices for consumers?

Answer 11

Could lead to welfare gains for consumers by keeping the prices low

Question 12

What are minimum prices?

Answer 12

A price set above the market equilibrium price by the government
(Prevents prices from being too low)

Question 13

Why might minimum prices be set?

Answer 13

To discourage the consumption/ production of a good
- it would reduce negative externalities from consuming demerit goods

Question 14

What are tradeable pollution permits?

Answer 14

Permit given to polluting firms, so firms will be able to pollute up to a certain amount ( any surplus on their permit can be traded)
- they attempt to limit the amount of negative externalities

Question 15

What are the advantages of tradeable pollution permits

Answer 15

• benefits the environment in the long run (encouraging green production methods)
• revenue raised from the permits - revenue could be reinvested into green products
• if the price of additional permits is more than the cost of investing in new pollution tech -firms will be incentivised to switch to greener tech
• firms can sell their spare permits and raise revenue

Question 16

What are the disadvantages of tradable pollution permits?

Answer 16

• firms may relocate where to where they can pollute (reducing prod costs)
• firms may pass high prod costs onto the consumer
• competition could be restricted in the market if permit create a barrier for potential firms
• could be expensive for gov to monitor emissions

Question 17

What is state provision of public goods?

Answer 17

When the state provide a public good which are underprovided in the free market (e.g. such as education & healthcare)
- these have external benefits

Question 18

What are the benefits of the state providing public goods?

Answer 18

• this makes merit goods more accessible, which might increase their consumption
• this could also yield positive externalities

Question 19

Why are public goods not provided by the free market?

Answer 19

Due to the free rider problem:
Where the goods and non-rival and non-excludable, so if provided anyone can use it without paying - loss of revenue.

Question 20

Disadvantages of providing public goods?

Answer 20

It could be expensive for government to provide public goods - will incur an opportunity cost of spending their revenue

Question 21

Why does the government provide information in the market?

Answer 21

• To ensure that there is no information failure and consumers make informed economic decisions
• information gaps cause market failure so information is provided for reduce asymmetric information

Question 22

What is regulation?

Answer 22

Regulation is a rule or law enacted by the gov that must be followed by economic agents. Used to encourage a change in behaviour.

• gov regulate either by commanding/ controlling

Question 23

Why do government regulate in markets?

Answer 23

To limit harm from negative externalities of consumption/ production

Question 24

What commands do gov apply?

Answer 24

• bans (e.g public smoking ban)
• limits (e.g . age limits on buying alcohol)
• caps (e.g. carbon emission caps/ finishing)
• compulsory actions (e.g graphic warnings on cig packets)

Question 25

What controls do gov apply?

Answer 25

• enforcement
• punishment (e.g. fines/ jail sentences )

Question 26

What is gov failure?

Answer 26

Gov failure is when gov intervention designed to correct market failure leads to a less efficient allocation of resources.