Government Intervention

Question 1

What is the main role of the government in a free market system

Answer 1

To protect property rights, uphold the rule of law and maintain the value of the currency

Question 2

Main reasons for policy intervention

Answer 2

• correct market failure
• to achieve equitable distribution of income and wealth
• improve economy performance

Question 3

Type of market failure: factor immobility

Answer 3

Consequences: structural unemployment

Example of intervention: state investment in education

Question 4

Type of market failure: public goods

Answer 4

Consequence: failure of market to provide, free rider problem
Example of intervention: government funded public goods

Question 5

Type of market failure: demerit goods

Answer 5

Consequence: over consumption of negative externalities

Example of intervention: information campaigns

Question 6

Type of market failure: merit goods

Answer 6

Consequence: under consumption of positive externalities

Example of intervention: subsidies

Question 7

Type of market failure: imperfect information

Answer 7

Consequence: damaging consequences for consumer- poor choices
Example of intervention: labelling

Question 8

Type of market failure: high relative poverty

Answer 8

Consequence: low income families suffer social exclusion, -ve externalities
Government intervention: taxation

Question 9

Type of market failure: monopoly power

Answer 9

Consequence: higher prices for consumers- loss of allocative efficiency
Example of intervention: competition policy, measures to encourage new firms into a market