Government Intervention In Markets

Question 0

What is government legislation and regulation?

Answer 0

Can pass laws e.g

• ban of smoking in public places
• employment laws which offer protection like max working hours

Can introduce regulation e.g

• price controls in main utilities (telecommunications, electricity, gas)
• introducing fresh competition

Free markets economists= too much unnecessary ‘red tape’

Question 1

What are the 3 main reasons for policy intervention?

Answer 1

1. To correct instances of market failure
2. To achieve a more equitable distribution of income and wealth
3. To improve the performance of the UK economy both domestically and on the international front

Question 2

What is direct provision of goods and services?

Answer 2

State funding used to provide merit goods and services and public goods directly to the population.
E.g paying private sector firms to operate prisons and maintain road network

Question 3

What is an indirect tax?

Answer 3

A tax on spending.
Used to raise the price of demerit goods that generate negative externalities in order to reduce demand.
E.g tax on cigarettes, alcohol and fuel

Question 4

What is a subsidy?

Answer 4

Money paid to producers to increase levels of production of goods or services.
They lower the cost of merit goods to consumers.
E.g financial help for UNI

Question 5

What is tax relief?

Answer 5

The government may offer financial assistance such as tax credits for businesses investment in research and development.
Or a reduction in cooperation tax.

Question 6

What are changes to taxation and welfare payments?

Answer 6

They can be used to influence the overall distribution of income and wealth.
E.g higher direct tax rates on rich households or an increase in the value of welfare benefits for the poor

Question 7

What are 4 examples of solutions to information failure?

Answer 7

1. Compulsory labelling on cigarette packages with health warnings
2. Improved nutritional info on foods
3. Anti-speeding tv adverts to reduce speeding and raise awareness of drink driving
4. Adverts on health screening programmes/info campaigns on dangers of addiction

Question 8

How do governments solve negative externalities? (3)

Answer 8

-Regulation
-Pollution permits (allows firms to pollute up to a certain limit)
-financial intervention
E.g taxes (space between S1 and S2 to the left)
Subsidy (space between S1 and S2 to the right)

Question 9

What is a buffer stock?

Answer 9

Storing more supply in case of a shock to demand or supply.

E.g agricultural: may be a storm to destroy crops

Question 10

How do governments regulate and control monopolies? (3)

Answer 10

1. Block merging of companies which could lead to one large firm
2. Impose regulations on firms that dominate market e.g price controls
3. Remove barriers to other firms entering market e.g any laws

Question 11

What is political self-interest?

Government failure

Answer 11

When economic decisions are based upon elections.

E.g boosting welfare spending in the run up to an election

Question 12

What is policy myopia?

Government failure

Answer 12

The argument that politicians have a tendency to choose short term solutions to difficult economic problems.
E.g building more roads to combat traffic

Question 13

What is regulatory capture?

Government failure

Answer 13

When industries under the control of a regulatory body appear to operate in the favour of producers rather than consumers.

Question 14

What are disincentive effects?

Government failure

Answer 14

Free market economics argue that attempts to reduce income and wealth inequalities can worsen incentives and productivity.

Question 15

What are policies based on imperfect info?

Government failure

Answer 15

Hard to accurately discover the true preferences of the total population as people are voting less or voting for self interest rather than economy.

Question 16

What is the law of unintended consequences?

Government failure

Answer 16

The actions of consumers and producers, and especially gov, always have unanticipated effects.
E.g increasing tax on cigarettes leads to tax avoidance

Question 17

What are costs of administration and enforcement?

Government failure

Answer 17

Estimated social benefits of a policy might be outweighed by administrative costs of introducing it.

Question 18

What are conflicting objectives?

Government failure

Answer 18

Introducing a policy may generate negative effects.

e.g reducing unemployment by stimulating total demand which causes inflation

Question 19

What are the disadvantages of subsidies?

Answer 19

• hard to determine level it should be set
• subsidy will have limited effect if there is inelastic demand
• producers may fail to pass the subsidy onto consumers
• firms become reliant on subsidy and insufficient
• time lag