Government Intervention in Markets (1.4.1)

Question 1

What are the 7 types of government intervention?

Answer 1

-Minimum price schemes
-Maximum price schemes
-Indirect Taxes
-Subsidies
-Regulation
-Tradeable permits
-Provision of Information

Question 2

What’s an example of a good that is overconsumed in the economy?

Answer 2

A prime example is alcohol

Question 3

What will happen to the price of alcohol if there is increased consumption?

Answer 3

There will be a competition will sellers to get the best value to attract customers. This may allow consumers to consumer alcohol at extremely low prices

Question 4

What’s a way for the government to reduce this overconsumption of beer?

Answer 4

Minimum Price Scheme

Question 5

What is a Minimum Price Scheme? What does it look like on a graph?

Answer 5

Sets a price floor above equilibrium to reduce the consumption of a Demerit Good or Service.
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Question 6

What do Minimum Price Schemes do to Demerit Goods?

Answer 6

Reduce the consumption of demerit goods and reduce exploitation of suppliers. It creates excess supply and so is bad.

Question 7

How is Consumer and producer surplus affected by a minimum price scheme on a graph?

Answer 7

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Question 8

What are the advantages of a Minimum Price Scheme?

Answer 8

-Reduces consumption of Demerit goods
-Reduces exploitation of suppliers

Question 9

What are the disadvantages of a Minimum Price Scheme?

Answer 9

-Creates Excess supply
-Prices out low income households
-Government may have to buy up excess supply
-Costly to implement and enforce

Question 10

What’s an example of a need that is overpriced meaning some households can’t afford it?

Answer 10

Rent is a prime example. Landlords aim to make a profit and pass on any increases in utility bills onto the renter. This means that come low income households can’t achieve their own accommodation without government subsidies

Question 11

What’s a solution to prevent overpriced goods/services?

Answer 11

Maximum Price Schemes

Question 12

What is a Maximum Price Schemes?

Answer 12

Sets a price ceiling below equilibrium to allow low-income households to afford that good or service

Question 13

Why are Maximum Price Schemes used?

Answer 13

When goods and services are overpriced it can often be done to Supply and Demand. Market Equilibrium can be a higher price than people are willing to pay.

Question 14

What does Maximum Price Scheme look like on a graph?

Answer 14

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Question 15

How can a maximum price scheme increase the affordability of a necessity item?

Answer 15

A maximum price scheme makes a firm reduce their price by setting a maximum price that they can give their products or services. This helps to increase the affordability of an item as it reduces the price people have to pay and helps low income households.

Question 16

What are the advantages of a Maximum Price Scheme?

Answer 16

-Reduces price of necessity items for low income households
-Caps prices to reduce exploitation of consumers

Question 17

What are the disadvantages of a Maximum Price Scheme?

Answer 17

-Creates Excess demand
-Black markets for resale
-Less incentive to supply goods/services so quality falls
-Costly to implement and enforce

Question 18

What’s a real-life example of a Maximum Price Scheme in the UK?

Answer 18

Energy Price Cap which makes a maximum price for Gas and Electricity. This makes it more affordable energy for households.

Question 19

What is a quota?

Answer 19

Sets a max legal output in a market forcing market price up and reducing over-consumption and demerit goods

Question 20

What does a quota look like on a graph?

Answer 20

Normal supply and demand graph with supply 2 going straight up before the equilibrium. This shows the cap

Question 21

What is the impact of a quota on a supply and demand diagram?

Answer 21

A quota sets a maximum legal output in a market forcing market price and reducing over-consumption of demerit goods. On a graph the supply will be a straight up line to the left of the supply 1 and so the price will be increased.

Question 22

What is regulation?

Answer 22

Clear rules for firms in a particular market to follow

Question 23

What are the three types of regulation?

Answer 23

1.Limiting
2.Banning
3.Requring a specific activity (focus on only that activity)

Question 24

What are the three main types of regulation? Examples?

Answer 24

-Banning activities e.g. disposable vapes
-Limiting a given activity e.g. fishing cap
-Requiring a specific activity e.g. accurate info presented so red, amber, green on kitkat- Shows what customer truly buying

Question 25

What are Tradeable Pollution Permits?

Answer 25

When a certain amount of permits is given to businesses on how much pollution they can have. If a business has too much pollution they can buy spare pollution permits from other businesses that don’t need the permit.

Question 26

What are the advantages of TPP’s?

Answer 26

-Encourages firms to reduce their emissions
-Gives firms increased incentives to reduce emissions to be low to earn money from selling permits
-Can have a quick impact in highly polluting markets

Question 27

What are the disadvantages of TPP’s?

Answer 27

-Allows inefficient firms to remain inefficient
-Difficult and costly to monitor the inefficient firms
-Firms may choose to relocate rather than invest in green technology if they don’t have enough TPP’s
-Firms may choose to remain inefficient if the fine is less costly than the investment

Question 28

What does a supply and demand look like for tradeable pollution permits?

Answer 28

The supply is a straight up line and the demand is a diagonal line going from the top of the y axis to the right side of the x axis and all of the labels have permits at the end of them (s, d, p + q). Supply is perfectly inelastic as there are only a certain amount of them and where they cross is the market price for them.

Question 29

What is the goal with green technology for businesses?

Answer 29

The goal is to get businesses to switch to green technology but the problem with this is it is very expensive and so businesses prefer not to unless they have no choice.

Question 30

What are the two main roles of state provision of information?

Answer 30

1. Regulate buyers/ sellers to provide full information about a good or service.
2. Provide info about the costs or benefits of a good or a service.

Question 31

What does improved information do to the demand of a product?

Answer 31

Forces firms to provide more information leading to lower demand reducing over-consumption and demerit goods

Question 32

What does improved information do to a supply and demand graph?

Answer 32

This will cause the demand to decrease as more people know more information about the product or service and so it can lead to lower demand which reduces the over-consumption of demerit goods.