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.
