Government Intervention in Markets (1.4.1) Flashcards
What are the 7 types of government intervention?
-Minimum price schemes
-Maximum price schemes
-Indirect Taxes
-Subsidies
-Regulation
-Tradeable permits
-Provision of Information
What’s an example of a good that is overconsumed in the economy?
A prime example is alcohol
What will happen to the price of alcohol if there is increased consumption?
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
What’s a way for the government to reduce this overconsumption of beer?
Minimum Price Scheme
What is a Minimum Price Scheme? What does it look like on a graph?
Sets a price floor above equilibrium to reduce the consumption of a Demerit Good or Service.
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What do Minimum Price Schemes do to Demerit Goods?
Reduce the consumption of demerit goods and reduce exploitation of suppliers. It creates excess supply and so is bad.
How is Consumer and producer surplus affected by a minimum price scheme on a graph?
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What are the advantages of a Minimum Price Scheme?
-Reduces consumption of Demerit goods
-Reduces exploitation of suppliers
What are the disadvantages of a Minimum Price Scheme?
-Creates Excess supply
-Prices out low income households
-Government may have to buy up excess supply
-Costly to implement and enforce
What’s an example of a need that is overpriced meaning some households can’t afford it?
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
What’s a solution to prevent overpriced goods/services?
Maximum Price Schemes
What is a Maximum Price Schemes?
Sets a price ceiling below equilibrium to allow low-income households to afford that good or service
Why are Maximum Price Schemes used?
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.
What does Maximum Price Scheme look like on a graph?
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How can a maximum price scheme increase the affordability of a necessity item?
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.
What are the advantages of a Maximum Price Scheme?
-Reduces price of necessity items for low income households
-Caps prices to reduce exploitation of consumers
What are the disadvantages of a Maximum Price Scheme?
-Creates Excess demand
-Black markets for resale
-Less incentive to supply goods/services so quality falls
-Costly to implement and enforce
What’s a real-life example of a Maximum Price Scheme in the UK?
Energy Price Cap which makes a maximum price for Gas and Electricity. This makes it more affordable energy for households.
What’s a buffer stock scheme?
Where both maximum and minimum price schemes are implemented at the same time. This is often the case with agricultural products whose prices fluctuate massively.
What are indirect taxes?
Taxes that are levied on goods and services rather than directly on individuals or income. These taxes are not paid directly by the taxpayer to the government, but are instead passed on by producers or sellers to the consumers as part of the price of goods or services.
How are Indirect Taxes a type of government intervention?
When the good has a negative externality, the government can introduce indirect taxation to prevent market failure. This will cause a fall in supply and increase the costs to the individual, so supply shifts to S2 (left)
What are the advantages of Indirect Taxes?
-It iternalises the externality- market now produces at social equilibrium position and social welfare is maximised
-Raises gov revenue
What are the disadvantages of Indirect Taxes?
-Difficult to know the size of the externality and so difficult to target the tax (Imperfect information)
-Could be conflict between gov goal of raising rev and solving externality
-Could lead to creation of black market
-Taxes are politically unpopular so governments may be reluctant to introduce them
-They are regressive meaning the poor spend a larger proportion of their income than the rich
What is a subsidy?
Financial assistance provided by the government or other authorities to support or promote specific sectors, industries, or individuals. It is essentially a form of economic aid designed to reduce the cost of a product or service, encourage production, or make certain goods more affordable for consumers.
How is a subsidy a method of government intervention?
In order to solve positive externalities, the gov can introduce subsidies. Can also be used to fix info gaps. This will shift supply curve right as will lower cost of production.
What are the advantages of subsidies?
-Society reaches the social optimum output and welfare is maxmised
-Can have other positive impacts, such as encouraging small businesses, bringing about equality and encouraging exports
What are the disadvantages of subsidies?
-The government has to spend large amount of money, which will have high opportunity cost
-Difficult to target since exact size of externality is unknown
-Subsidies can cause producers to become inefficient
-Once introduced, subsidies are difficult to remove
What is a quota?
Sets a max legal output in a market forcing market price up and reducing over-consumption and demerit goods
What is the impact of a quota on a supply and demand diagram?
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.
What is regulation?
Clear rules for firms in a particular market to follow
What are the three types of regulation?
1.Limiting
2.Banning
3.Requring a specific activity (focus on only that activity)
What are the three main types of regulation? Examples?
-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
What are the advantages of regulation?
-Can ensure consideration of externalities, prevent exploitation of consumers and keep consumers fully informed. This will help to overcome market failure and maximise social welfare
What does a quota look like on a graph?
Normal supply and demand graph with supply 2 going straight up before the equilibrium. This shows the cap
What are the disadvantages of regulation?
-Laws may be expensive for govt to monitor, incurring an opportunity costs
-Don’t take into account different costs of laws for diff companies. Less efficient method of reducing pollution
-Govt can suffer from regulatory capture
-Firms may pass on costs to consumer in form of higher prices
-Excessive regulation may reduce competition in a market
What are Tradeable Pollution Permits?
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. This limits the maximum amount of pollution which can lead to greener technology
What are the advantages of TPP’s?
-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
What are the disadvantages of TPP’s?
-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
What does a supply and demand look like for tradeable pollution permits?
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.
What is the goal with green technology for businesses?
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.
What is Provision of Information?
When there is asymmetric information, the government provides information to allow people to make informed decisions. They may also force companies to provide information
What are the two main roles of state provision of information?
- Regulate buyers/ sellers to provide full information about a good or service.
- Provide info about the costs or benefits of a good or a service.
What does improved information do to the demand of a product?
Forces firms to provide more information leading to lower demand reducing over-consumption and demerit goods
What does improved information do to a supply and demand graph?
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.
What are the advantages of Provision of Information?
-Helps consumers to act rationally, which allows market to work properly
-Best if government uses this alongside other policies
What are the disadvantages of Provision of Information?
-Can be expensive for government to do, incurring an opportunity cost
-Government themselves may not have all the information so may be difficult to inform customers
-Consumers may not listen to info provided due to irrational behaviour
What’s a real-life example of provision of information?
Labels on cigarette packages and information campaigns on speeding, obesity, drinking and smoking. Despite these information campaigns, many consumers still undertake harmful and dangerous activities
