Government Intervention And Failure

Question 1

Give two advantages of government intervening in markets through subsidies

Answer 1

Reduction in cost of production enables firms to lower prices, incentivising people to increase consumption

Question 2

Give two disadvantages of government intervening in markets through subsidies

Answer 2

Opportunity cost of spending taxpayers money elsewhere, will not increase consumption if demand inelastic

Question 3

Give two advantages of government intervening in markets through maximum price controls

Answer 3

Enable low income consumers to afford a product, help to prevent increase in inflation

Question 4

Give two disadvantages of government intervening in markets through maximum price controls

Answer 4

Quantity demanded above quantity supplied creating a shortage, producers may exit market in order to use their resources to produce more profitable goods

Question 5

Give two advantages of government intervening in markets through minimum price controls

Answer 5

Producer surplus increased, producers and consumers have stable price enabling planning

Question 6

Give two disadvantages of government intervening in markets through minimum price controls

Answer 6

Quantity supplied greater than quantity demanded so creates surplus (producers inefficient), opportunity cost of spending taxpayers money in storage costs

Question 7

Give two advantages of government intervening in markets through tradable pollution permits

Answer 7

Artificial market created which works through market mechanism (little admin costs), incentive for firms to reduce pollution

Question 8

Give two disadvantages of government intervening in markets through tradable pollution permits

Answer 8

Pollution continues at lower level, large efficient firms may buy up permits and continue to pollute

Question 9

Give two disadvantages of a government intervening in a market by providing a public good

Answer 9

Opportunity cost of spending taxpayers money, information gaps may mean incorrect amount provided

Question 10

Give an advantage of government intervening in markets through providing information

Answer 10

Ensures all consumers have perfect information and no asymmetries

Question 11

Give a disadvantage of government intervening in markets through providing information

Answer 11

Opportunity cost of spending taxpayers money

Question 12

Give two advantages of government intervening in markets through regulations

Answer 12

Can limit extent of an activity, might act as incentive for producers to develop new technologies to avoid activity

Question 13

Give a disadvantage of government intervening in markets through regulation

Answer 13

Opportunity cost of spending taxpayers money on enforcing regulations

Question 14

Give two advantages of government intervening in markets through property rights

Answer 14

Act as an incentive for firms to take into account both private and external costs, low administration costs

Question 15

Give two disadvantages of government intervening in markets through property rights

Answer 15

Problem of assigning property rights, if breach of property rights occurred, there may be an expensive legal procedure to determine how much compensation should be paid and to whom