government intervention in markets

Question 1

purpose of government intervention

Answer 1

to correct market failure and increase total welfare

Question 2

methods of intervention (8) TRES SIMPPS

Answer 2

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

Question 3

effect of indirect tax (2)

Answer 3

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

Question 4

effect of subsidies (2)

Answer 4

• can incentivize production of socially desirable goods
• can make necessary goods cheaper

Question 5

effect of maximum and minimum prices (2)

Answer 5

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

Question 6

effect of provision of information

Answer 6

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

Question 7

effect of property rights extension

Answer 7

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

Question 8

effects of state provision (of public goods)

Answer 8

ensures access and potentially reduces costs compared to private provision.

Question 9

effects of tradable pollution permits (2)

Answer 9

incentivizes efficient pollution reduction creates a market for emissions.

Question 10

effects of regulation (2)

Answer 10

protect consumers and the environment, and promote fair competition

Question 11

how are minimum prices used in labor market

Answer 11

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

Question 12

evaluation of indirect taxes (2)

Answer 12

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

Question 13

evaluation of subsidies (2)

Answer 13

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

Question 14

evaluation of maximum price (2)

Answer 14

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

Question 15

evaluation of minimum price (2)

Answer 15

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

Question 16

evaluation of tradable permits (2)

Answer 16

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.

Question 17

evaluation of extension of property rights

Answer 17

difficult to identify who should get property right.

Question 18

how to solve tragedy of commons?

Answer 18

extension of property rights

Question 19

how does extension of property rights help (4)

Answer 19

• 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.

Question 20

evaluation of state provision

Answer 20

It has opportunity cost from government spending.

Question 21

evaluation of regulation

Answer 21

1. It depends on ability to monitor.

Question 22

evaluation of Provision of information (3)

Answer 22

• 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

Question 23

Causes of government failure (5) UIMEL

Answer 23

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

Question 24

government failure of state provision

Answer 24

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

Question 25

government failure of tax (3)

Answer 25

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

Question 26

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

Answer 26

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

Question 27

how is moral hazard a government failure

Answer 27

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.

Question 28

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

Answer 28

- 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