Government Intervention In Markets Flashcards
What are the types of government intervention to correct market failure (8)
-tax
-subsidies
-max and min prices
-education
-regulation
-tradable pollution permits
-state provision
-extending property rights
How does tax correct market failure
Increases firms cost of production
Reduces supply
Internalises the externality
What are some limitations of using taxes to correct market failure
-hard to equate tax to the external cost
-effectiveness depends on elasticity of demand
-can be regressive
How do subsidies correct market failure
Reduce costs of production
Increases supply
Lowers price
What are some limitations of using subsidies to reduce market failure
-very expensive
-oportunity costs
-difficult to equate subsidy to the external benefit
-producers may take subsidy but not decrease price
What is a minimum price
A price which the good must not fall below
What is a limitation of minimum prices
Very expensive because the government must buy up the excess supply
What is a maximum price
A price of which the good cannot rise above
What is a limitation of maximum prices
Can cause excess demand if set below equilibrium price which distorts the price mechanism
How can education help correct market failure
Providing info about goods with positive externalities can increase the consumption
Providing info about goods with negative externalities can decrease the consumption
What are some limitations of education to reduce market failure
-advertising campaigns can be very expensive for the government
-evidence suggests people have become immune to negative advertising campaigns
How can regulation help correct market failure
Imposing laws and enforcing them through fines and legal prosecution
What are some limitations of using regulation to correct market failure
-costly to enforce
-opportunity cost
-difficult to know where to set regulation limit
How can tradable pollution permits help correct market failure
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
What are the limitations of tradable pollution permits to correct negative externalities
-difficult to know how many permits to issue
-costs of monitoring the scheme
How can state provision help correct market failure
It provides public goods that otherwise may not have been produced
Increases the consumption of goods with positive externalities and benefits to society
What are some limitations of using state provision to reduce market failure
-can be expensive
-opportunity costs
-gov ran schemes (like NHS) are often inefficient
-gov ran schemes need further regulation to keep good standards
How can extending property rights help correct market failure
Internalises the externality and holds firms responsible
What are some limitations of extending property rights to reduce market failure
-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
