government intervention

Question 1

summery of gov intervention in markets

Answer 1

Governments intervene in markets to try and overcome market failure. The government may also seek to improve the distribution of resources (greater equality). The aims of government intervention in markets include

Stabilise prices
Provide producers/farmers with a minimum income
To avoid excessive prices for goods with important social welfare
Discourage demerit goods/encourage merit good

Question 2

minimum prices

Answer 2

This involves the government setting a lower limit for prices, e.g. the price of potatoes could not fall below 13p.

The minimum price could be set for a few reasons:

Increase farmers incomes
Increase wages
Make demerit goods more expensive. For example, a minimum price for alcohol has been proposed.

Question 3

maximum prices

Answer 3

This involves putting a limit on any increase in price e.g. the price of housing rents cannot be higher than £300 per month.

Maximum prices may be appropriate in markets where

Suppliers have monopoly power and are able to generate substantial economic rent by charging high prices
The good is socially important – e.g. good quality housing is important to labour productivity and a nations’ health.
Demand is price inelastic because the good is necessary for maintaining minimum standards of living.

Question 4

buffer stocks

Answer 4

Agriculture suffers from various problems. These include:

Fluctuating Prices
Uncertainty leads to lack of income
Low-Income elasticity of demand
Positive Externalities of Farming
Therefore the government may feel there is a case to intervene and stabilise prices. A buffer stock involve a combination of minimum and maximum prices. The idea is to keep prices within a target price band.

Question 5

nudges

Answer 5

This is a different kind of government intervention. It is a government policy to influence demand indirectly. For example, putting cigarettes behind closed covers – makes it harder or less enticing for people to buy.

The government may also place flashing speed limit signs to give a smiley face to drivers under the speed limit, but an unhappy face to drivers exceeding the speed limit.

Question 6

Tax

Answer 6

Tax is a method to discourage consumption of certain goods. For example, taxes on demerit goods – goods with negative externalities. Taxes both discourage consumption and raise revenue for the government.

A specific tax is a fixed amount of tax placed on a particular good. It

Question 7

problems of tax

Answer 7

Demand may be inelastic
Hard for the government to know external cost and how much to tax
May encourage tax evasion – e.g. rubbish tax can encourage fly-tipping

Question 8

subsidy

Answer 8

The government may subsidise goods with positive externalities (for example, public transport or education).

Question 9

problems of subsidy

Answer 9

Cost to government
Subsidies may encourage firms to be inefficient because they can rely on government aid.