Government Intervention In Markets

Question 1

What are the types of government intervention to correct market failure (8)

Answer 1

-tax
-subsidies
-max and min prices
-education
-regulation
-tradable pollution permits
-state provision
-extending property rights

Question 2

How does tax correct market failure

Answer 2

Increases firms cost of production
Reduces supply
Internalises the externality

Question 3

What are some limitations of using taxes to correct market failure

Answer 3

-hard to equate tax to the external cost
-effectiveness depends on elasticity of demand
-can be regressive

Question 4

How do subsidies correct market failure

Answer 4

Reduce costs of production
Increases supply
Lowers price

Question 5

What are some limitations of using subsidies to reduce market failure

Answer 5

-very expensive
-oportunity costs
-difficult to equate subsidy to the external benefit
-producers may take subsidy but not decrease price

Question 6

What is a minimum price

Answer 6

A price which the good must not fall below

Question 7

What is a limitation of minimum prices

Answer 7

Very expensive because the government must buy up the excess supply

Question 8

What is a maximum price

Answer 8

A price of which the good cannot rise above

Question 9

What is a limitation of maximum prices

Answer 9

Can cause excess demand if set below equilibrium price which distorts the price mechanism

Question 10

How can education help correct market failure

Answer 10

Providing info about goods with positive externalities can increase the consumption
Providing info about goods with negative externalities can decrease the consumption

Question 11

What are some limitations of education to reduce market failure

Answer 11

-advertising campaigns can be very expensive for the government
-evidence suggests people have become immune to negative advertising campaigns

Question 12

How can regulation help correct market failure

Answer 12

Imposing laws and enforcing them through fines and legal prosecution

Question 13

What are some limitations of using regulation to correct market failure

Answer 13

-costly to enforce
-opportunity cost
-difficult to know where to set regulation limit

Question 14

How can tradable pollution permits help correct market failure

Answer 14

A set number of permits are issued
Polluting firms are given a quota of these permits
Permits not used can be traded to other firms

Question 15

What are the limitations of tradable pollution permits to correct negative externalities

Answer 15

-difficult to know how many permits to issue
-costs of monitoring the scheme

Question 16

How can state provision help correct market failure

Answer 16

It provides public goods that otherwise may not have been produced
Increases the consumption of goods with positive externalities and benefits to society

Question 17

What are some limitations of using state provision to reduce market failure

Answer 17

-can be expensive
-opportunity costs
-gov ran schemes (like NHS) are often inefficient
-gov ran schemes need further regulation to keep good standards

Question 18

How can extending property rights help correct market failure

Answer 18

Internalises the externality and holds firms responsible

Question 19

What are some limitations of extending property rights to reduce market failure

Answer 19

-difficult to allocate due to imperfect info
-compensation is difficult to assess due to imperfect info
-using the legal system is expensive and time consuming for both parties involved