Government intervention in markets(1)

Question 1

Government intervention

Answer 1

The government gets involved in a market to try and reduce market failure, allocating resources efficiently

Question 2

Reasons for gov intervention: to reduce market failure

Answer 2

-eliminate negative externalities
-maximize positive externalities
-reduce supply of demerit goods
-increase supply of merit goods

Question 3

How and why does gov Intervention try to reduce the unequal distribution of wealth and income?

Answer 3

unequal distribution leads to poverty, creating tension in society. This means further market failure
Use progressive tax - tax rich people?

Question 4

gov intervention in industry

Answer 4

gov targets full employment, the most important industries are those with more labour

Question 5

Where can governement allocate resources to?

Answer 5

gov spends money on society eg healthcare, education

Question 6

gov allocation of resources: tax & subsidies

Answer 6

expensive to buy products that have negative externalities and make products cheap that have positive externalities

Question 7

gov allocation of resources:gov-t’s use of regulations

Answer 7

-Stops monopoly power that would cause higher prices and protects consumers
- encourage productive efficiency

Question 8

gov objective: economic growth

Answer 8

more jobs- more income- improved living standards
improve international competitiveness.
better consumer + producer spending

Question 9

gov objective: unemployment

Answer 9

lower gov spending on unemployed-related welfare
higher income
social benefits (no crime, improve wellbeing)
reduce poverty
more spending may impact merit goods e.g NHS

Question 10

gov objective: Inflation

Answer 10

high or rising inflation damages the value of money.
inflation target of 2% has been set by the gov

Question 11

ways of dealing with market failure

Answer 11

-tax = shift in supply
-subsidies = shift in supply
-state provision e.g. NHS = shift in supply
-regulations
-price controls = contraction or extension

Question 12

types of tax

Answer 12

direct - on individual or organization
indirect- on goods or services
incidence - amount consumers/ producers pay for the tax

Question 13

minimum pricing ( price floor )

Answer 13

form of gov intervention that sets out a legal minimum price of a good/service to prevent prices from falling too low

Question 14

Reasons for minimum pricing

Answer 14

protects producers
encourages production
reduces the consumption of certain goods
corrects market failure

Question 15

consequences of minimum pricing

Answer 15

Surplus production - wasted resources
inefficient allocation of resources
high prices for consumers receiving low-income

Question 16

Maximum pricing ( price ceiling )

Answer 16

price set by the gov.t that is lower than the market price, sellers cannot charge higher prices as they would in a free market

Question 17

Reasons for maximum pricing

Answer 17

• improve affordability of goods + services for consumers

Question 18

consequences of maximum pricing

Answer 18

• lead to shortages as producers may not be able to pay their costs at a lower price - can exit their market or reduce production