Government intervention

Question 1

What is government intervention?

Answer 1

Government intervention- internalises (external cost/benefit of 🚘 incorporated in price) external costs/benefits … corrects market failure by allocating resources ⬆️ efficiently

Question 2

How can the government intervene?

Answer 2

1) Subsidies
2) Indirect taxes
3) Max prices
4) Min prices
5) Tradable pollution permits
6) State provision of info

Question 3

How many ways can the government intervene?

Answer 3

6

Question 4

What is an indirect tax?

Answer 4

Indirect tax- levied on expenditure of 🚘/🧹- imposed on 🚘/🧹 with ⬆️ external costs

Question 5

What is an example of an indirect tax?

Answer 5

Petrol ⛽️

Question 6

What does an indirect taxation external cost diagram look like?

Answer 6

See bottom of page 19 on economics theme 1 notes

Question 7

What are the evaluation points of indirect taxation?

Answer 7

👍- tax funds raised used by government to clean up environment OR compensate victims of pollution
- BUT based on assumption that government ✖️ corrupt- may keep 💵 for themselves … ✖️ used well
👎- If demand inelastic then external cost ✖️ reduced as consumption still ⬆️- ALSO if demand inelastic then tax may have bigger burden on consumer than producer
👍- difficult to evade- included in market price- sellers collect tax & send to government
- BUT Firms may declare income ⬇️ than actual to evade tax e.g. India 🇮🇳
👎- makes firms ⬇️ competitive as costs ⬆️-> outcompeted by foreign firms OR firms may relocate to other nations where ⬇️ or ✖️ tax … ⬇️ domestic GDP

Question 8

What is a subsidy?

Answer 8

Subsidy- grant provided by government to encourage production & consumption of 🚘/🧹- imposed on 🚘/🧹 with ⬆️ external benefits e.g. education 📚

Question 9

How is the benefit of a subsidy received by the consumer?

Answer 9

Benefit of subsidy received by consumer in the form of ⬇️ price

Question 10

How is the benefit of a subsidy received by the producer?

Answer 10

Benefit of subsidy received by producer in the form of ⬇️ production costs

Question 11

What are the evaluation points of a subsidy?

Answer 11

👍- ⬆️ alternative forms of economic activity e.g. renewable energy- create ⬇️ pollution- promotes sustained economic growth & reduces external costs e.g. pollution
👎- opportunity cost- ⬇️ government spending elsewhere or ⬆️ taxes
👍- external benefits internalised so social optimum level achieved
👎- unintended consequences e.g. firm dependence on subsidy-> inefficient production

Question 12

What is a maximum price?

Answer 12

Max price- set below market equilibrium price by government

Question 13

What are the characteristics of a max price?

Answer 13

• Limit price ⬆️- make 🚘/🧹 cheaper e.g. protect exploitation of tenants
• Causes shortages/excess demand- 🚘/🧹 cheaper
• Max price set above ⬆️ market equilibrium price- ✖️ effect

Question 14

What are the evaluation points of a max price?

Answer 14

👍- ⬇️ exploitation of consumers & allow ⬇️ income ppl afford essentials e.g. rental 🏠
👎- unintended consequences- government intervention distorts price mechanism as excess demand remains due to ⬇️ price & price ✖️ be bid up due to price cap … shortage
👍- ⬇️ inequality- salary cap on ⬆️ paid workers
👎- shadow (🏴) markets could be created- ppl pay ⬆️ for 🚘/🧹 to ensure they obtain it

Question 15

What does a maximum price diagram look like and what do the annotations mean?

Answer 15

See bottom of page 20 economics theme 1 notes

Question 16

What is a minimum price?

Answer 16

Min price- set above market equilibrium price by government

Question 17

What are the characteristics of a min price?

Answer 17

• Limit price can ⬇️- make 🚘/🧹 expensive e.g. income protection-min wage
• Causes surplus /excess supply- 🚘/🧹 expensive
• Surplus created purchased by government agency at guaranteed minimum price
• Min price set below ⬇️ market equilibrium price- ✖️ effect

Question 18

What are the evaluation points of minimum prices?

Answer 18

👍- ⬇️ consumption of harmful 🚘 e.g. 🍷, 🚬 etc-> ⬇️ demand -> producers switching to healthy drink🥤 & food 🍎 production
- BUT if demand inelastic then min price ⬇️ effective
👎- ⬆️ 🍎 & 🥤 prices-> hardship for low income consumers
👍- guaranteed min price scheme-> ⬆️ producer incomes-> ⬆️ employment in that sector
- BUT guaranteed min price scheme involves opportunity cost as taxes ⬆️ OR government spending elsewhere ⬇️
- Guaranteed income-> ⬇️ efficiency because ⬇️ profit incentive to produce ⬆️ quality food etc
👎- surpluses bought by government may be sold over🌊 for ⬇️ prices-> outcompete farmers in developing nations

Question 19

What are tradable pollution permits?

Answer 19

Permits bought & sold in market

Question 20

When have a tradable pollution permits been used in real life?

Answer 20

Emissions trading system (ETS)- ‘cap & trade’ system (nations allocated CO2 permits- divided between firms of nation- tradable between firms)

Question 21

Why are tradable pollution permits good?

Answer 21

Incentive for firms to invest in clean 🧼 technology & ⬇️ CO2 emissions

Question 22

What are the evaluation points of tradable pollution permits?

Answer 22

👍- governments can ⬆️ fund by selling nations reserve permits- 💰 used to clean 🧼 environment & compensate victims
- BUT if government corrupt then 💰 may be kept
👎- information gap-> too ⬇️ OR too ⬆️ permits issued-> production costs ⬆️-> ⬇️ international competition-> firms relocate OR ⬇️/✖️ incentive for firms to ⬇️ pollution
👍- pollution permits & … pollution ⬇️ (2008- ETS carbon allocation ⬇️ by 5%)
👎- firms may pass cost of permits to consumers via ⬆️ prices- ⬆️ likely if demand inelastic

Question 23

What does a minimum price diagram look like and what do the annotations mean?

Answer 23

See page 21 middle of page 21 economics theme 1 notes

Question 24

Why does the state provide information?

Answer 24

Information gaps -> market failure … government intervention ⬇️ this

Question 25

What are 3 examples of state provision of information?

Answer 25

1) Use of social media to promote production & consumption of healthy 🚘 e.g. 🍇 & 🍅 etc
2) Use of social media to discourage production & consumption of unhealthy 🚘 e.g. 🚬 etc
3) Remind ppl of laws for some protection e.g. seatbelt in 🚙 & ✖️ to🍷 & 🚙 etc