Government Intervention in Markets Flashcards
Why would a government intervene in a market?
In order to correct market failure.
How would imposing indirect taxes solve market failure?
Can reduce production, reducing the negative externality of pollution.
How can imposing subsidies solve market failure?
Can give an incentive to produce more eg produce more solar panels in order to reduce harming the environment, reducing negative externalities.
How can imposing price ceiling solve market failure?
If people are unable to afford buying necessities eg food, imposing a price ceiling can help people afford these necessities. These goods can have positive externalities in consumption.
How can imposing price floor solve market failure?
Give people less incentive to consume demerit goods and reduce negative externalities in consumption.
How can regulation solve market failure?
Eg closing information gaps, pollution levels
How can imposing trade pollution permits solve market failure?
Limit the amount of pollution a firm can produce.
How can state provision of public goods solve market failure?
Due to the nature of a public good, in a free market, market failure will occur, so government intervenes by taking taxes, ensure public goods are supplied to everyone.
How can the provision of information solve market failure?
Information failures occur because one party to a transaction does not have the information that is available to make a decision. A government can step in to provide information itself eg no smoking ads.
