Government Intervention In The Market Flashcards
What are the causes of market failure? (7)
Public goods Merit goods Demerit goods Income inequality Imperfect knowledge Monopolies Immobility of factors of production
What are the characteristics of a public good?
Non-rivalry and Non-excludable
What is a merit good?
Under consumed and over priced in a free market
What is a demerit good?
Over consumer and under priced in a free market
What is income inequality?
An unfair distribution of income among a population
What is imperfect knowledge?
When consumers do not know the full benefits/costs of the product they are consuming
What is a monopoly?
A firm that has 25% or more market share
What is the immobility of factors of production?
There is a loss of productive potential
What are the solutions to market failure? (6)
Regulation Taxation Information provision Subsidies Permits Min/max price
What is regulation?
A firm will be fined for breaking the rules
Why are regulations effective?
The firm has to take into account external costs
What does taxation do?
Internalises the externality
Why is taxation effective?
Polluter pays the true cost of their decision
What is information provision
Makes consumers aware of the full benefit/cost
Why is information provision effective?
Takes the information into account when making decisions
What are subsidies?
A sum of money granted by the government in order to encourage supply by lowering the cost of production
Why are subsidies effective?
A lower cost of production can be passed on to the consumer, so the consumer pays lower prices
What are permits?
Firms are only allowed to pollute a certain amount
Why are permits effective?
Incentive to reduce pollution
What is government failure?
When government intervention leads to a misallocation of resources
What are the sources of government failure? (4)
Inadequate information
Conflicting objective
Administration costs
Regulatory capture
What are the associations involved with competition policy? (CC, DTI, OFT)
Competition commision
Department of trade and industry
Office of fair trading
What 2 policies may be used by the competition policy?
Monopoly policy and Merger policy
What is monopoly policy?
Break up the monopoly by price control and taxing profits
What are the 2 methods of price control?
Marginal cost pricing (MC=AR)
Average cost pricing (ATC=AR)
What is privatisation?
Involves the transfer of publicly owned assets to the private sector
What are the advantages of privatisation? (3)
Revenue raising
Promotes competition
Promotes efficiency
What are the disadvantages of privatisation? (3)
Monopoly abuse
Focus on dividends
Loses out on potential profit
What is nationalisation?
When the government take control of an industry previously owned by the private sector
What are the advantages of nationalisation? (3)
Lower cost of production
Economies of scale
Better control
What are the disadvantages of nationalisation? (2)
Lack of competition
Lower performance
What is regulation?
Used to limit and deter monopoly exploitation of consumers
What is deregulation?
Removal of any previously imposed regulation that have restricted competition and freedom of market activity
What is a public-private partnership? (PPP)
Is a public/private service that is funded through a partnership of public and private sector firms
What is a private finance initiative? (PFI)
The government becomes an enabler rather than a provider
What is equality?
How equal something is
What is equity?
How fair something is
What is horizontal equity?
Same treatment to everyone
What is vertical equity?
Unequal treatment of unequals
What is relative poverty?
When the income is less than the average by a certain amount
What is absolute poverty?
When the income is below a certain level necessary to maintain a minimum standard of living
What is the poverty trap?
When low income households have disincentives to work because of the tax/benefit system
What are the causes of poverty? (3)
Income inequality
Inheritance
Falling value of state benefits
What are the effects of poverty? (3)
Poor education
Poor health
Low living standards
What are some of the policies the government may use to try and reduce poverty? (3)
Reduce unemployment
Progressive taxes
Increase the national minimum wage
What is cost benefit analysis?
A method of decision making that takes into account of external as well as private costs and benefits
