Government intervention and government failure

Question 1

Define market-based policy.

Answer 1

an approach to tackling market failure by using market mechanism to influence behaviour of consumers or producers

Question 2

Define regulation.

Answer 2

intervention to tackle market failure by direct action to command and control behaviour

Question 3

Define indirect tax.

Answer 3

tax levied on expenditure on goods or services

Question 4

What is internalising an externality?

Answer 4

an attempt to deal with an externality by bringing an external cost or benefit into the price system (eg congestion charge)

Question 5

What is the polluter pays principle?

Answer 5

an argument that a form causing pollution should be charged the full external cost that they inflict on society

Question 6

How would the ideal pollution tax be calculated?

Answer 6

as that which moves demand to equal marginal social benefit

Question 7

Define prohibition.

Answer 7

attempt to prevent consumption of a good by declaring it illegal

Question 8

What is a tradable pollution permit system?

Answer 8

system for controlling pollution based on a market for permits that allow firms to pollute up to a limit

Question 9

Name two advantages of a tradable pollution permit system.

Answer 9

• incentive to find methods to produce with less pollution
• government can control total pollution level

Question 10

Name two disadvantages of a tradable pollution permit system.

Answer 10

• can be difficult to enforce
• difficult to decide on appropriate maximum pollution level, as hard to measure MPC and MSC

Question 11

Given an example of a tradable pollution permit system.

Answer 11

• EU Emissions Trading System, which limits greenhouse gas emissions through “cap and trade” system, with cap gradually reducing over time, or
• UK Emissions Trading System (introduced post-Brexit) which works in same way

Question 12

What is NIMBY?

Answer 12

Not In My Back Yard, ie where people are happy to support construction, eg wind farms, as long as it’s not close to them

Question 13

Give an example of price control in UK.

Answer 13

Minimum price per alcoholic unit in Scotland, since May 2018

Question 14

Define government failure.

Answer 14

misallocation of resources arising from government intervention to correct market failure, causing less efficient allocation of resources and therefore welfare loss to society

Question 15

What are the four main causes of government failure?

Answer 15

• distortion of price signals
• unintended consequences
• excessive administration costs
• information gaps

Question 16

Give an example of unintended consequences leading to government failure.

Answer 16

Imposing rent controls, ie maximum rents, can reduce supply of rented accommodation, leading to homelessness and higher house prices