Government Intervention In The Market Flashcards
What is the definition of economic welfare?
Allocative efficiency?
=the standard of living of an individual or group
=occurs when it is impossible to improve overall economic welfare by reallocating resources between industries or markets
What is a missing market?
Occurs when the incentive function of prices completely breaks down and a market fails to come into existence or disappears.
Describe the price mechanism.
- Signalling= prices provide info to traders
- Incentive= info signalled by relative prices incentivises people to alter their economic behaviour
- Rationing= change in economic behaviour causes goods/services to be rationed to consumers as prices or demand increase
How might the Gov policy negative externalities?
•Regulation/quality control E.g max emission limits •Taxation (internalises externality) E.g pollution tax •Permits E.g traded pollution permits •Trading property rights E.g Coase Theorem
What are Gov policies to encourage positive externalities?
•Regulation
E.g Local authorities requiring maintaining of houses
•Subsidies
E.g public transport production or travel for consumers
What is a demerit good?
What is a merit good?
=a good, such as tobacco, for which the social costs of consumption exceed the private
Over consumed in the free market
=a good, such a healthcare, for which the social benefits of consumption exceed the private
Under consumed in the free market
What are policies the Gov use to encourage/discourage merit or de merit goods?
Merit= regulation, subsidies, MAX price
De merit= regulation, taxation, MIN price
What is Gov failure?
Occurs when government intervention in the economy is ineffective, wasteful or damaging
What is cost-benefit analysis?
A technique for assessing all the costs and benefits likely to result from an economic decision.
The social costs and benefits rather than just the private.
What are some implications with CBA?
- Forecasting= difficult to forecast all costs and benefits e.g development of new technologies
- Objectives= helps to choose between different ways of achieving an objective but not alternative objectives
- Social Welfare= uses 60 year old Hicks-Kaldor test which assumes compensation to “losers” which is inaccurate
What is market failure?
Occurs when a market functions badly, unsatisfactory or not at all.
What are Gov policies aimed to reduce poverty+income inequalities?
•Progressive Taxation: rich pay a higher proportion of income tax than the poor
•Transfers to the poor: income paid by state to benefits recipients+funded by tax
E.g unemployment benefits
•Tax credits: Gov pay those on lower incomes
What is horizontal equity?
What is vertical equity?
H= describes households paying similar taxes+receiving similar benefits
V= redistributes income from rich to poor on the basis of need
What is competition policy?
=aims to make goods markets more competitive, compromises policy toward monopoly, mergers+restrictive trading prices
What are the 3 parts to competition policy?
•Monopoly= Competition and Markets Authority (CMA) uses structure, conduct + performance to measure public interest
•Merger= CBA measures mergers+takeovers by whether they lead to a substantial lessening of competition
European Commission for those in EU
•Restrictive trading practice policy= an activity undertaken by a firm on its own or in collusion with other firms that restricts competition
CMA
What is a cartel?
What is a fully integrated monopoly?
=a price ring formed when independent firms make a collective restrictive trading agreement to charge the same price+possibly reduce output
=a dynamic firm grows+benefits from economies of scale, becoming a monopoly as a reward for successful competition
What is a statutory monopoly?
When one firm has over 25% of the market for the supply or acquisition of a particular good or service. (Scale monopoly)
When a number of firms together have a 25% share+restrict competition. (Complex)
What are the 7 alternative approaches to monopolies?
- compulsory breaking up
- use of price controls
- taxing profits
- rates of return regulation (min or max)
- public ownership (nationalisation)
- privatising (privatisation)
- deregulation+removal of barriers to entry
What is nationalisation?
What is privatisation?
=owned by the state
=transfer of publicly owned assets to private sector
What are the pros of privatisation?
✔️Gov revenue raising as reduced spending ✔️promotion of competition ✔️promotion of efficiency ✔️capitalism (public owning shares) ✔️reduces trade union power ✔️increased investment
What are the cons of privatisation?
✖️monopoly abuse
✖️short-termism rather than long-termism
✖️reduction in investment
✖️unemployment if private firms want to cut costs
What are public private partnerships? (PPPs)
Partnerships between private and public sectors to provide public services.
E.g the London Underground
•public= London Underground Limited (LUL)
•private= PriceWaterhouse Coopers (PWC)
What is regulatory capture?
Theory that regulatory agencies eventually come to be dominated by the very industries they were charged with regulating
What is deregulation and what are the methods involved?
=opening up markets and encouraging the entry of new suppliers
1) promotion of competition+market contestability through removal of barriers to entry
2) removal of red tape and bureaucracy which imposes unnecessary costs
3) boosting market supply
4) breaking down prices for consumers
5) encouraging investment+productivity
What is a price taker?
What is a price maker?
=an individual or company that is not influential enough to affect the price of a good
=a monopolistic company that can dictate the prices it sets due to a lack of substitutes
What is a public good?
- non-excludable= any consumer can access the good without having to pay a financial cost
- non-rivalry= multiple consumers can simultaneously consume the good
- non-rejectable= consumers cannot disallow the good, e.g flood defence
Market failure= private sector cannot afford to provide it, hard to measure social benefits (G)
What is the tragedy of the commons?
- every individual tries to reap the greatest benefit from a given resource
- demand exceeds supply, every individual who consumes an additional unit directly harms others who can no longer enjoy the benefits
