Government Intervention Flashcards
How do markets and prices allocate resources?
Through the 4 functions of the price mechanism:
- Signalling
- Incentives
- Rationing
- Allocation
What is signalling?
When it’s shown if prices are too high or low
How do prices incentivise?
A change in prices may alter the economic behaviours of the economic agents:
-A rise in prices may throw off consumers from buying the goods and services (less quantity will be demanded)
-A rise in prices may influence suppliers to supply more, as they realise there are more profits to be made;
-Similarly in the labour market, higher wages may incentivise workers to acquire new skills and supply more of their labour (by working more hours maybe)
All of these factors give rise to the concept of the supply and demand curves
What is the role of rationing in the price mechanism?
Where rising prices ration demand for a product:
-The rising price is symbolic of the consumers’ strength of being able to pay, and their preferences, thus rationing demand for the good
This gets rid of the excess demand, as there were too many consumers being able to pay for lower prices, and as we know with higher prices, they turn off some consumers from being able to pay.
It only distributes scarce goods to consumers who value them the most.
What is the role of allocation in the price mechanism?
Resources are brought away from markets with excess supply and high prices into markets where there’s excess demand and low prices
(basically where supply=demand,
or the market equilibrium)
Thus achieving allocative efficiency
An example of a market performing the allocative function of prices
The housing market:
1.) Demand for housing in a particular area increases, meaning prices tend to rise (in order to ration away excess demand)
2.) This increase in price signals to suppliers that there’s higher demand
3.) This encourages them to allocate more resources to building homes in that area
4.) Therefore, the market price helps allocate resources efficiently based on consumer demand
How does the market fail?
-Due to inequity (such as uneven distribution of income and wealth) (can lead to social tensions and disparities in access to essential goods and services, especially for the poor - thus hindering economic growth and stability)
-And inefficiency (e.g the price mechanism fails to allocate resources efficiently) - this is partial market failure, because of misallocation of resources
Complete market failure - when there’s a missing market (because the functions of prices have broken down)
How can the price mechanism break down?
Through de-merit goods (e.g cigarettes) and negative externalities (e.g pollution):
-The prices of de-merit goods such as cigarettes and alcohol don’t account for the full social costs that they may impose (as they may be sold to cheaply) : thus leading to overconsumption
- Negative externalities like pollution mess with the prices, as increased production costs (such as pollution control) may be passed onto the consumers as they may have to pay higher prices.
leading to inefficient resource allocation (as firms may be too focused on dealing with pollution issues rather than productive activities) and therefore market failure
How can the government improve efficiency?
-By encouraging innovation (dynamic efficiency)
-Improving resource allocation (allocative efficiency)
-Boosting productivity (productive efficiency)
This can drive long-term economic growth and competitiveness
How does the government ensure social welfare?
- By providing essential services (public goods)
- Social safety nets (benefits system)
- Access to quality healthcare, education, affordable housing and job training
- Property rights
What is nationalisation?
When the state takes over a privately owned company so that it’s wholly or majority state-owned and controlled
Why might a company be nationalised?
Because they may not be socially efficient
What is privatisation?
The sale of state-owned companies to the private sector (normally through a stock exchange)
Why might the government privatise a company?
Because there’s a profit motive; this can raise revenue for the government.
With the sold-off firm going into a free market, there’s the belief that firms will be more productively and dynamically efficient;
resources will be allocated efficiently (with the price mechanism) .
Examples of sectors that have been privatised
Gas, water, railway, Royal Mail
Who and why proposed renationalising the Royal Mail, rail services, energy supply networks, regional water and sewerage companies, and banks in 2019?
Jeremy Corbyn during his election battle against the conservatives and Boris Johnson:
- There have been many strikes with the rail services and they’re abusing their monopoly power by raising ticket prices
- Energy supply networks have risen their prices for house owners
- Water and sewerage companies have been exploiting the public with their monopoly power (high prices and haven’t been dynamically efficient in fixing the leakages and pollution in the water)
- Banks have been charging high interest rates
Why did this person lose to the conservatives after proposing the renationalisation of these sectors?
Because the public may not want to pay more taxes for the government to maintain these sectors
Which company is commercially funded but publicly owned by the state?
Channel 4 - raises their revenue through adverts but is owned by the government
