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Microeconomics Theme 1 > Government intervention > Flashcards

Government intervention Flashcards

1
Q

What does it mean if the UK is a mixed economy

A
  • Both private enterprise and the government allocate resources
  • To solve the economic problem of what, how and for whom to produce
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2
Q

Reasons for government intervention in markets

A
  • Support firms: help remain competitive
  • Promote equity: reduce opportunity gap between rich and the poor
  • Correct market failure
  • Collect government revenue: to provide essential services, public and merit goods.
  • Support poorer households: redistribute income.
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3
Q

When is there government intervention in a market

A

When there is a market failure

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4
Q

What do governments attempt when intervening

A

They try to correct market failure so that resources are allocated more efficiently

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5
Q

What measures could a government undertake to correct market failure

A
  • Indirect taxation
  • Subsidies
  • Maximum prices
  • Minimum prices
  • Trade pollution permits
  • Regulation
  • Provision of public goods
  • Provision of market information
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6
Q

What are indirect taxes

A

Taxes levied on the expenditure of goods and services

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7
Q

What type of goods do the government impose taxes on

A

Goods which have significant external costs (tobacco, alcohol)

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8
Q

Advantages of indirect taxes to correct market failure

Level of pollution

A
  • Level of pollution should fall as output of the good or service is reduced and price is increased.
  • Therefore social optimum position of MSB=MSC can be achieved.
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9
Q

Advantages of indirect taxes to correct market failure

Internalisation of indirect tax

A
  • Internalisation of indirect taxes:
  • Indirect taxes force polluters (both producer and consumer) to pay for the external costs
  • This internalises the external costs in the case of pollution
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10
Q

Advantages of indirect taxes to correct market failure

Indirect taxes are convenient

A

Indirect taxes are convenient
* They tend to be paid in small amounts in a regular manner

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11
Q

Advantages of indirect taxes to correct market failure

Tax funds raised for the government

A
  • Tax funds raised for the government
  • This can be used to clean environment
  • This can be used to compensate pollution victims
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12
Q

Disadvantages of indirect taxes to correct market failure

A
  • Difficult to quantify external costs and place a monetary value on them. So the social optimum position may not be achieved.
  • Increased costs of production for firms due to indirect taxes
    This makes firms less competitive internationally.
  • Firms may relocate to other countries with less restrictive taxes on production
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13
Q

What is a subsidy

A

A grant provided by the government to encourage the production and consumption of a good or service

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14
Q

Where are subsidies often applied on

A
  • Goods or services with significant external benefits
  • E.g education and healthcare
  • E.g renewable energy to create less pollution
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15
Q

What is the effect of the subsidy for the renewable energy good

A

To lower the price of each unit from Pe to P1 and to increase quantity from Qe to Q1

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16
Q

Advantages of subsidies applied to renewable energy markets

A
  • Reduce air pollution and other external costs
  • Internalises external benefits from renewable forms of energy by working with market forces
    So social optimum level of output can be reached
  • Subsidies on renewable energy generation promote sustained economic growth
  • Reduction of consumption of non-renewable energy resources
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17
Q

Disadvantages of subsidies

A
  • Unintended consequences may occur E.g firms may become dependent on subsidies = inefficient in production without subsidies
  • Opportunity cost to government subsidies may lead to higher taxes or cuts in government spending

-They may be a waste of money
E.g many subsidised bus services operate with hardly any passengers

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18
Q

evaluation of indirect taxes

A
  • depends on impact on different interest groups
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19
Q

evaluation of subsidies

A
  • depends on magnitude of the event
  • e.g government subsidies in the renewable energy market
  • this will depend on how large the subsidies are as a proportion of total production costs for firms
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20
Q

Define maximum price

A

A ceiling price set by the government on a good or service above which it cannot rise

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21
Q

Examples of maximum price schemes

A
  • Governments have tried different types of rent control – keeping the cost of renting below a certain level.
  • With monopoly power, train companies could increase the peak tickets, but governments may impose a maximum price (or maximum price increase on firms) to keep tickets affordable – even if it leads to over-crowding.
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22
Q

Where is the maximum price usually set

A

set by the gov below the existing free market equilibrium price

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23
Q

Advantages of maximum prices

A
  • prevent an increase in the country’s rate of inflation.
  • prevent exploitation of consumers by monopolies
  • enable consumers on low incomes to be able to afford to buy a product.
24
Q

Disadvantages of maximum prices

A
  • difficult for the government to monitor and enforce price controls in markets.
  • shortages = consumers unable to find supplies of the product
25
Q

What is a minimum price

A

producers receive a certain price for their product or that consumers have to pay atleast a set price for the product

26
Q

Where have minimum price schemes been used

A
  • minimum hourly wage rates in the labour market
  • goods to deter consumption (demerit goods)
27
Q

Minimum price effect on agriculture

A
  • The EU had a Common Agricultural Policy (CAP) which aimed to increase the income of farmers by setting minimum prices.
28
Q

Where is the minimum price usually set

A

above the existing free market equilibrium price

29
Q

How does a government agency respond to excess supply

A

1) Agriculture markets:
- purchase the excess supply and export it

2) Demerit markets: producers will lower their output to match the QD at the minimum price

30
Q

What will happen if a minimum price is set below the free market equilibrium price

A

Nothing happens;

31
Q

Advantages of minimum prices

A
  • producers know in advance the price they will receive for their product.
  • Prevent exploitation of producers by wholesalers and retailers who have significant buying power.
  • producers can plan investment and output
32
Q

Disadvantages of minimum prices

A
  • if minimum price is set too high = more surpluses
  • costs of storage
  • encourage over-production = inefficient allocation of resources.
33
Q

What are tradable pollution permits

A

rights to sell and buy actual or potential pollution in artificially created markets.

34
Q

Why did the European Commission(EC) set up the ETS (emissions trading system)

A

to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively.

35
Q

Why are pollution permits tradable

A

permits may be traded between firms so that ‘clean’ firms can sell their surplus permits to firms that are more polluting.

36
Q

Advantages of tradable pollution permits

A
  • incentive for firms to reduce pollution
  • costs of administrating these schemes are low
  • planned reduction in pollution over time.
37
Q

Disadvantages of tradeable pollution permits

A
  • large efficient firms buy up permits and continue to pollute
  • need to be internationally enforced to be effective
  • pollution will continue at a lower level than previously
38
Q

What is the state provision of public goods

A

policy response to the lack of provision of public goods by the free market, is for the government to provide them , financed through taxation

39
Q

What is the purpose of state provision of public goods

A
  • beneficial to society
  • e.g roads, parks, lighthouse, national defence
40
Q

What is the purpose of state provision of information

A

Governments can set up information portals , reduce asymmetric information

e.g job centres, consumer rights websites.

41
Q

Define regulation

A

create rules to limit harm from negative externalities of consumption/production.

e.g. OFSTED

42
Q

What is the Environmental Protection Act 1990

A

keep specified land clear of litter and refuse, and on local authorities and the Secretary of State to keep clean public highways for which they are responsible.

43
Q

Advantages of regulation

A
  • limit the amount of pollution
  • incentive for producers to develop new technologies that reduce pollution.
  • limit external costs
44
Q

Disadvantages of regulation

A
  • limits consumer sovereignty
  • needs to be properly enforced/ employed to ensure.
45
Q

Define government failure

A

When government intervention leads to an inefficient allocation of resources and a net welfare loss

46
Q

Causes of government failure

A
  • Distortion of price signals
  • Unintended consequences
  • Excessive administration costs
  • Information gaps
47
Q

What is the distortion of price signals

A

Government actions which distort the operation of the price mechanism leading to a misallocation of resources

48
Q

Define law of unintended consequences

A

The actions government, producers or consumers will always have unintended effects

49
Q

Unintended consequence of indirect taxes

A
  • May lead to development of illegal markets
  • E.g alcohol smuggling
    -This leads to growth in organised crime and a loss of tax revenue for the government
50
Q

Unintended consequence of subsidies

A
  • May lead to firms becoming dependent on subsidies and inefficient in production

-Difficult to withdraw subsidies once they are in place

E.g grants to rail companies

51
Q

Unintended consequence of max price controls

A
  • May lead to acute shortages of goods and services

E.g max wage on highly skilled workers; Could lead to a shortage of specialised workers in the banking sector

-This could undermine economic growth

52
Q

Unintended consequence of min price controls

A
  • May lead to surpluses of goods and services

E.g a min wage for lowly skilled workers:Could lead to unemployment as labour becomes too expensive for firms to employ

53
Q

Unintended consequence of trade pollution permits

A
  • May not reduce carbon emissions easily
  • E.g large polluting firms may find it easier and cheaper to buy spare permits on the market
    Rather than investing in expensive equipment to reduce carbon emissions
54
Q

Unintended consequence of regulations

A
  • May lead to regulatory capture
  • This is where the regulator acts in the interest of firms rather than of consumers, even though the regulator is meant to protect consumers
55
Q

Define administration costs

A

The costs which arise in the monitoring and enforcing of government measures to correct market failure

56
Q

Define government information gaps

A

decision makers do not have perfect information and face political pressures.

Microeconomics Theme 1 (4 decks)

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