government intervention in markets Flashcards

purpose and methods of government intervention, government failure

1
Q

purpose of government intervention

A

to correct market failure and increase total welfare

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2
Q

methods of intervention (8) TRES SIMPPS

A

indirect taxation
subsidies
maximum and minimum prices
tradable pollution permits
extension of property rights
state provision
regulation
provision of information

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3
Q

effect of indirect tax (2)

A
  • this can raise revenue for government spending, discourage excessive consumption of demerit goods
  • can earn tax revenues, thus fund public goods and other costs
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4
Q

effect of subsidies (2)

A
  • can incentivize production of socially desirable goods
  • can make necessary goods cheaper
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5
Q

effect of maximum and minimum prices (2)

A
  • can ensure essential goods remain affordable (minimum wage) or prevent price gouging during emergencies.
  • help producers or to decrease consumption of a demerit good
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6
Q

effect of provision of information

A

empowers consumers to make informed choices and can indirectly influence market behavior

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7
Q

effect of property rights extension

A

can incentivize responsible management and investment in those resources, factors of production will be used more efficiently

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8
Q

effects of state provision (of public goods)

A

ensures access and potentially reduces costs compared to private provision.

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9
Q

effects of tradable pollution permits (2)

A

incentivizes efficient pollution reduction creates a market for emissions.

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10
Q

effects of regulation (2)

A

protect consumers and the environment, and promote fair competition

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11
Q

how are minimum prices used in labor market

A

to protect workers from wage exploitation. These are called minimum wages

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12
Q

evaluation of indirect taxes (2)

A
  1. It is difficult to measure external cost (EC) in terms of money, then it is hard to
    identify the proper level of tax on pollution or tax on demerit goods.
  2. Producers may pass on tax to consumers rather than reducing pollution
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13
Q

evaluation of subsidies (2)

A
  1. It has an opportunity cost to government.
  2. It increases tax burden to next generation and it creates government debt.
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14
Q

evaluation of maximum price (2)

A
  1. Shortage or excess demand (Disequilibrium)
  2. Maximum prices can lead to black market
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15
Q

evaluation of minimum price (2)

A
  1. There will be excess supply or surplus (Qs - Qd)
  2. It needs government help to buy surplus. (Qs - Qd)
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16
Q

evaluation of tradable permits (2)

A
  1. It is difficult to identify proper level of permit (if supply rises, price will be too low, wont incentivize)
  2. it has high administrative cost and monitoring cost.
17
Q

evaluation of extension of property rights

A

difficult to identify who should get property right.

18
Q

how to solve tragedy of commons?

A

extension of property rights

19
Q

how does extension of property rights help (4)

A
  • clear ownership assigns responsibility for someone to take care of it
  • When ownership is clear, individuals are more likely to invest in improving the resource
  • Property rights allow owners to lease, sell, or develop the resource, creating a market
  • can facilitate environmental regulations and enforcement.
20
Q

evaluation of state provision

A

It has opportunity cost from government spending.

21
Q

evaluation of regulation

A
  1. It depends on ability to monitor.
22
Q

evaluation of Provision of information (3)

A
  • Providing too much information can overwhelm consumers
  • Not all consumers actively seek out information, and some might make choices based on emotions or brand loyalty
  • Collecting, verifying, and disseminating information can be expensive for governments
23
Q

Causes of government failure (5) UIMEL

A

Information gaps
lack of incentives
Unintended consequences
Excessive administrative costs
moral hazard

24
Q

government failure of state provision

A

lack of incentives, Goods and services provided by government may be inefficient as the gov lacks of profit
motive

25
Q

government failure of tax (3)

A

unintended consequences,
- Income tax may discourage people to work
- Indirect tax is regressive tax which mainly falls on poor people resulting in higher income inequality or larger income gap between rich and poors
- indirect tax of elastic goods can result in a severe fall in demand as price rises, fall in revenue

26
Q

government failure of tradable permits, extension of property rights and regulation

A

needs a lot of monitoring and setting up, the administrative cost of correcting market failure can be large that it
outweighs the welfare benefit from the correction of market failure

27
Q

how is moral hazard a government failure

A

providing too much welfare can lead people to misuse it and incur costs without taking care of the issue. Providing unemployed benefits may reduce incentive to find jobs.

28
Q

why does state provision of public goods lead to excess demand (3)

A
  • Since public goods are not directly sold, there’s no market price to guide production decisions.
  • Consumers might not fully appreciate the true cost of the public good because they aren’t paying a direct price
  • difficult for the government to determine the optimal level of production