Government intervention Flashcards
What provides an argument for government intervention in markets?
The existence of market failure in its various forms
Market failures can include negative externalities, positive externalities, public goods, and information asymmetries.
How do governments influence the allocation of resources?
Through public expenditure, taxation, and regulations
These methods aim to correct market failures and achieve economic objectives.
What are some methods of government intervention to correct market failure?
- Indirect taxation
- Subsidies
- Price controls
- State provision
- Regulation
- Correcting information failure
- Pollution permits
What is the purpose of indirect taxation?
To increase the cost of supply for a firm, shifting the supply curve up and to the left
It aims to reduce consumption of goods with high negative externalities.
What is a subsidy?
A payment made to producers to encourage increased production of a good or service
Subsidies decrease the cost of supply, shifting the supply curve down and to the right.
What happens when a minimum price is imposed?
It leads to excess supply as firms will wish to supply more at a higher price
This can create a surplus in the market.
What is state provision?
When the government intervenes to supply a good or service
This often occurs for merit goods like education and public goods like defense.
What is the goal of regulation?
To create competitive markets and protect consumer interests
Effective regulation can lead to greater choice and lower prices.
What is information failure?
When consumers consume too much or too little of a good due to lack of information
Governments may use clearer labeling and campaigns to address this issue.
What are pollution permits?
Legal rights given to firms to pollute a certain amount
Firms can buy or sell permits based on their pollution levels.
What is a downside of pollution permits?
Difficult to measure pollution levels and potential for administrative costs
There are also concerns about rich countries buying permits from poorer ones.
True or False: Governments intervene to reduce inequalities in the distribution of income and wealth.
True
This intervention aims to prevent poverty and social tensions.
Fill in the blank: Governments aim to _______ the supply of merit goods.
[increase]
This is part of their objective to improve societal welfare.
What are the macro objectives often tied to government intervention?
- Reduce inequality of income/wealth
- Support full employment
- Provide essential infrastructure
What is the effect of taxation on the economy?
It finances government spending and controls the economy
Taxation is imposed on products, individuals, and businesses.
What creates a market for pollution permits?
The ability for firms to buy and sell permits based on their pollution levels
Prices are set by demand and supply.
What is a potential problem with the EU Emissions Trading Scheme?
Political interference has created a glut of permits, making it ineffective
This can undermine the scheme’s goals of reducing emissions.
What is the role of public expenditure?
Government spending to meet societal needs such as health, education, and infrastructure
Public expenditure is crucial for providing services that the market may underprovide.
