Government Intervention In Markets Flashcards
a. Direct Provision
H: Provision of G+S by govt., govt. produce good or fully finance private firms. Usually done when complete market failure (Public good) but also when partial market failure (Merit good)
A: Certainty of outcome, directly provide to Qs
L: Govt. less experienced and lack profit motive –> Lower quality/inefficient
L: Strain on govt. budget
b. Joint Provision (Public-Private Partnerships)
H: Public (Govt.) and private sector share risks+responsibilities and combine resource+expertise, aiming to provide quality services to public while maintaining affordability.
A: Risk sharing. Operational risks to private, policymaking + protect public interest to govt.
A: Profit driven private firm encourage cost-efficiency, lower prices for consumrs
L: Complex nature of PPP when drafting. Govt. have to weigh cost+benefit with aim to maximise social welfare, not easy. Could lead to greater DWL
c. Taxes
H: (Draw Diagram) For goods with -ve externality, govt. impose tax equal to MEC at Qs. Consumers/Producers internalise MEC, (Explain what happens on diagram) … Qs attained.
A: Assuming possible to calculate MEC, tax rate can be adjusted (△MEC), allowing flexibility + accuracy.
L: (Draw diagram) Hard to assess monterary value of MEC, unclear 3rd parties or how severe externalities are. Lead to overtaxation. Area A (overtaxation) > Area B (w/o govt.)
d. Subsidies + Special case
H: (Draw Diagram) For goods with +ve externality, govt. provide subsidy equal to MEB at Qs. Reduces COP, (Explain what happens on diagram) … Qs attained.
A: Assuming possible to calculate MEB, subsidy can be adjusted (△MEC), allowing flexibility + accuracy
L: Hard to assess monetary value of MEC. Leads to under-subsidisng (partial correction) or over-subsidising (greater DWL compared to w/o govt.)
Special case: Provided free (Qs when cost=0)
e. Quotas
H: For goods with -ve externality, legal restriction of qty. of G+S that can be produced in a particular time period. Prevent overconsumption/production as govt. impose quota = Qs.
A: Controls and limits qty at the source. Not subjected to resposiveness to price (C/P), outcome more certain
L: Shortage in mkt. Upward pressure on P, presence of black market which increases inequity (Only rich can consume)
f. Tradeable Permits
H: For goods with -ve externality, tradeable permits give firm right to emit specific qty of pollution into environment. Govt. calculates max. amt. of pollution. Firms below amt. can sell, above amt. can buy
A: Govt. simply set total amt. of permitted emissions to Qs
A: Firms incentivized to reduce pollution
L: Larger firms purchase alot of permits, do not reduce emission. Pollution concentrated at certain areas, compromise wellbeing of residents
g. Rules and Regulations
Legal intervention force consumers to behave certain ways which is more desirable
H (Ban): (Draw 2 diagrams,Qs when qty=0) No if DWL (ban) > DWL (w/o ban) Yes if -ve externality very severe,Qs=0.
H(+ve externality): Use legislation to increase production/consumption to Qs.
H(Imperfect info): Nutrition info on food, health warning on cigarettes, removal of unture ads
A: Simple and clear to understand, straightfoward to administer
L: Enforcement measures costly esp. in larger countries, greater DWL
Provision of Information and Public Education
H: (Draw Diagram,2 types) For Merit/Demerit goods, mkt failure due to imperfect info about cost and benefit. Govt. provide info to help consumers+producers value actual cost and benefit of G+S. Remove divergence between MPBactual and MPBperceived, Qs achieved.
A: Addresses root cause of problem,information failure. Prevents problem from persisting in future, serves as long term solution.
L:Difficult to change mindset of ppl,outcome uncertain. Takes long time,if ever, to be effective
What to keep in mind when doing evaluation?
(STRAW)
Situation Time-period Reccomendation Assumption --> Govt. goal (Equity vs Efficiency) Weigh-in
