Government Intervention Flashcards
What is nationalisation?
When the government takes full control of an entire industry, owns all the assets and all goods and services.
What is privatisation?
The government moves a nationalised industry into the private sector, a new plc is created and the shares are open to the public. They allow other firms to setup and give them unbridled access to infrastructure.
Privatisation, but why?
Restore the profit motive and encourage efficiency like controlling costs and innovating by exposing it to competition.
Nationalisation, but why?
Benefits of scale allows for the exploitation of economies of scale and reach the MES in natural monopolies but without the danger of private sector abuse of monopoly power as the government in answerable to the public.
What is regulation?
Involved rules and codes of conduct that firms have to follow. the government sets up a regulatory body whose job it is to enforce standards. Customers are able to complain to the regulator who can investigate and intervene with fines and bans.
Why do we regulate the economy?
To prevent exploitation of consumers via monopoly power also where there is assymetrical information/an information failure, to ensure safety and hygiene standards and quality.
Examples of government regulators
Competition and Markets Authority
Ofcom
Ofgem
Ofsted
Ofwat
Advertising Standards Authority
What is deregulation?
Removing regulations/red tape to help businesses/industries thrive and grow.
What market failure does a tax address?
Over-consumption of demerit goods
How does a tax work?
Increases the cost of production
Shifts supply in
Excess demand
Upward pressure on prices
Demand rations itself
Criticisms with a tax on a good/service.
Regressive impacts
Ineffective if demand is price elastic
Black markets
Doesn’t address information failure
Loss of business for support businesses
Unfair on responsible consumers
What is a subsidy?
Grant or payment fro the government to a producer.
What market failure does a subsidy address?
Under-consumption of a merit good
How does a subsidy work?
Reduces the cost of production
Shifts out supply
Excess supply
Downward pressure on price
More affordable/desirable
Latent demand becomes effective
Criticisms of subsidising a good/service
Expensive
Ineffective if demand is price inelastic
Creates producer reliance
Loss of business for un-subsidised businesses
What is a minimum price?
A legally imposed price floor beneath which the business cannot sell its product for.
How does a minimum price work?
Product becomes more expensive
Less affordable/desirable
Effective demand becomes latent
Demand rations itself
Effect of price elasticity on a minimum price?
Elastic- minimum price very effective
Inelastic- minimum price less effective
Criticisms of a minimum price.
Ineffective if demand is price inelastic
Regressive impacts
No impact on information failure
No revenue generated
Unfair on responsible users
Black markets
What is a maximum price?
Legally imposed price ceiling above which a business cannot sell its products.
How does a maximum price work?
Makes the product less expensive
More affordable/desirable
Latent demand becomes effective
Demand increases
Criticisms of a maximum price?
Producers have no incentive to meet the new demand
Deterioration of quality
Black market trading
Producers cut output and reallocate resources
Effect of supply elasticity on a maximum price?
Inelastic- suppliers cutting output is less of a threat due to its high cost and difficulty of getting out of the industry.
Elastic- Producers can easily adjust output and reallocate resources somewhere else where it is more profitable.
What is a buffer stock scheme?
This is a price support systems that can be used to reduce the volatility of pricing in markets where output and prices are unpredictable.
How does a buffer stock scheme work?
Supply is very inelastic or perfectly inelastic in the short term
Government sets a target price zone so that consumers aren’t paying too much but so producers and paid enough
Good harvest- government artificially increases demand
bad harvest- government releases stocks increasing supply
What are the benefits of using buffer stock schemes?
Provides certainty and confidence
Protects farmers earnings and consumers prices
Prevent food from becoming too expensive and unaffordable
What are the problems with buffer stock schemes?
Expensive to buy up stocks and store them in correct conditions
Mass wastage if a poor harvest never occurs
Money could be used for something else
What is direct provision?
Goods/services are provided by the government so that they are free at the point of use and is paid for by taxation.
What are the benefits of direct provision?
Increases consumption of merit goods
Reduces income inequality
Maximises provision to all
