Government intervention and government failure Flashcards
What is government intervention?
Government intervention refers to the actions taken by the government to influence the market and regulate economic activity.
List the different types of government intervention
Indirect Taxes
Subsidies
Tradable Pollution Permits
Maximum & Minimum Prices
State Provision of Public Goods
Provision of Information
Regulation.
What is a pollution permit?
The government sets a level of pollution that is allowed from a certain industry
Permits are issued by the government based on this level.
How can a pollution permit be used to counter act a problem?
In order to correct negative externalities, the government aims to use pollution permits.
What is an advantage of pollution permits?
Firms can trade pollution
permits.
What is a disadvantage of pollution permits?
Some firms argue that they
use ‘carbon offsetting’.
What is state provision?
State provision occurs when the government (or state) intervenes in the market in order to supply a good or a
service
This will occur if the government believes that the product is:
A merit good
The government supplies goods and services such as state education and health e.g. NHS as society
believes that these are under provided by the market mechanism
A public good
The government supplies goods and services such as defence and infrastructure e.g. roads as these
would be under provided by the public sector due to the free rider problem.
What is provision of information?
Provision of information ensures that economic units can maximise decisions when consuming and producing
goods and services
The government will provide information where the private sector fails to do so
The government provides information in a variety of areas e.g.
The job market
Dangerous products e.g. cigarettes
Economic data to help firms plan for the future.
What is regulation?
Regulation is defined as a set of rules, normally imposed by government.
extra info:
The government believes that this will protect the
interests of consumers so that they are not exploited by
firms
Effective regulation will lead to greater choice and lower
prices
Regulation takes place in a number of industries such as
telecoms, water and energy
A key reason for regulation is to create conditions for
continued investment in infrastructure in important
areas of the economy
What might be the costs of implementing
regulation?
Expensive for the government and for the
business (enforcing & monitoring)
Might not work effectively. Too strong – black
markets/bankruptcy.
‘Light-touch’ – inefficiency
What is a price minimum?
List an example:
A minimum price is a price floor for the market – suppliers cannot sell the product legally at a lower price.
(sets the lowest level that a good or service can legally be sold for. The desired effect is that consumption of the good will fall, resulting in a welfare gain to society).
Minimum Wage is an example of Minimum
Prices
What is a price maximum?
List an example:
A maximum price is a price ceiling for the market.
(in an attempt to prevent the market price from rising above a certain level).
For example: the government may set a maximum price of bread of £1 – or a maximum price of a weekly rent of £150.
Cons of minimum pricing:
Cons: Consumers will be paying more for their goods. Resources are wasted when excess goods are destroyed. Resources are allocated inefficiently - they could have been used elsewhere instead of producing excess supply.
Cons of maximum pricing:
Cons: A maximum price could deter firms from entering the market. It could also limit investment into the industry as the amount of profit firms can make is limited. Firms could cut costs too aggressively in an attempt to boost profit, leading to poor quality goods, etc.
What is government failure?
Government failure occurs when government intervention in markets or economic activities leads to an outcome that reduces overall economic welfare.
What are the different types of government failure?
Distortion of Price Signals
Unintended Consequences
Excessive Administrative Costs
Information Gaps
Explain distortion of price signals (government failure)
(do not need to know the full thing) - brief understanding needed
Massimo’s simplified definition: Price control (any government intervention) distort price signals so they are not reflective of demand and supply. So may over/under produce
Can occur when the government subsidises a failing market/firm
Causes firms to become reliant on subsidies and inefficient, if left to the free market, they would not survive
Firms show they are now making higher revenues than if they were not subsidised
Price mechanism is not able to act freely
Unintended Consequences
Explain unintended consequences (government failure)
(do not need to know the full thing) - brief understanding needed
Massimo’s simplified definition: Addressing one problem may cause another from imperfect understanding of markets.
Actions of producers and consumers have unexpected consequences
Regulation too high, driving firms out of the market
Subsidising failing marking, causing them to survive inefficiently
Policies could be expensive to implement and so it is hard to achieve original goals
Explain excessive administrative costs (government failure)
(do not need to know the full thing) - brief understanding needed
Massimo’s simplified definition: Reduce net benefits of a policy
The financial implementation costs outweigh the social benefits of a policy
When government intervenes in a market where there is excessive pollution with trade permits,
costs of policing the
firms can be higher than the benefits
Explain information gaps (government failure)
(do not need to know the full thing) - brief understanding needed
Massimo’s simplified definition: Leads to ineffectively allocation of resources to address the problem.
Governments also suffer from information gaps
Not having enough information about a market can lead to irrational decisions
Cost/Benefit Analysis needs to be carried out for perfect information, but this is time-consuming and expensive
What is a subsidy?
A subsidy is a government grant - part of government intervention
What is specific tax?
Set tax per unit (More tax is paid the higher the amount or volume of the goods purchased)
List an example of specific tax:
Example:
Sugar Tax
Duty on a pint of beer
What is Ad valorem tax?
Percentage tax (Tax levied as a % of the value of the good)
List an example of Ad valorem tax:
Example:
Value Added Tax
Is Ad valorem tax presented as pivotal or parallel on a diagram?
Pivotal
Is Specific tax presented as pivotal or parallel on a diagram?
Parallel
