Government Intervention In The Market

Question 1

What are the causes of market failure? (7)

Answer 1

Public goods
Merit goods
Demerit goods
Income inequality
Imperfect knowledge
Monopolies
Immobility of factors of production

Question 2

What are the characteristics of a public good?

Answer 2

Non-rivalry and Non-excludable

Question 3

What is a merit good?

Answer 3

Under consumed and over priced in a free market

Question 4

What is a demerit good?

Answer 4

Over consumer and under priced in a free market

Question 5

What is income inequality?

Answer 5

An unfair distribution of income among a population

Question 6

What is imperfect knowledge?

Answer 6

When consumers do not know the full benefits/costs of the product they are consuming

Question 7

What is a monopoly?

Answer 7

A firm that has 25% or more market share

Question 8

What is the immobility of factors of production?

Answer 8

There is a loss of productive potential

Question 9

What are the solutions to market failure? (6)

Answer 9

Regulation 
Taxation
Information provision
Subsidies
Permits
Min/max price

Question 10

What is regulation?

Answer 10

A firm will be fined for breaking the rules

Question 11

Why are regulations effective?

Answer 11

The firm has to take into account external costs

Question 12

What does taxation do?

Answer 12

Internalises the externality

Question 13

Why is taxation effective?

Answer 13

Polluter pays the true cost of their decision

Question 14

What is information provision

Answer 14

Makes consumers aware of the full benefit/cost

Question 15

Why is information provision effective?

Answer 15

Takes the information into account when making decisions

Question 16

What are subsidies?

Answer 16

A sum of money granted by the government in order to encourage supply by lowering the cost of production

Question 17

Why are subsidies effective?

Answer 17

A lower cost of production can be passed on to the consumer, so the consumer pays lower prices

Question 18

What are permits?

Answer 18

Firms are only allowed to pollute a certain amount

Question 19

Why are permits effective?

Answer 19

Incentive to reduce pollution

Question 20

What is government failure?

Answer 20

When government intervention leads to a misallocation of resources

Question 21

What are the sources of government failure? (4)

Answer 21

Inadequate information
Conflicting objective
Administration costs
Regulatory capture

Question 22

What are the associations involved with competition policy? (CC, DTI, OFT)

Answer 22

Competition commision
Department of trade and industry
Office of fair trading

Question 23

What 2 policies may be used by the competition policy?

Answer 23

Monopoly policy and Merger policy

Question 24

What is monopoly policy?

Answer 24

Break up the monopoly by price control and taxing profits

Question 25

What are the 2 methods of price control?

Answer 25

Marginal cost pricing (MC=AR) | Average cost pricing (ATC=AR)

Question 26

What is privatisation?

Answer 26

Involves the transfer of publicly owned assets to the private sector

Question 27

What are the advantages of privatisation? (3)

Answer 27

Revenue raising Promotes competition Promotes efficiency

Question 28

What are the disadvantages of privatisation? (3)

Answer 28

Monopoly abuse Focus on dividends Loses out on potential profit

Question 29

What is nationalisation?

Answer 29

When the government take control of an industry previously owned by the private sector

Question 30

What are the advantages of nationalisation? (3)

Answer 30

Lower cost of production Economies of scale Better control

Question 31

What are the disadvantages of nationalisation? (2)

Answer 31

Lack of competition | Lower performance

Question 32

What is regulation?

Answer 32

Used to limit and deter monopoly exploitation of consumers

Question 33

What is deregulation?

Answer 33

Removal of any previously imposed regulation that have restricted competition and freedom of market activity

Question 34

What is a public-private partnership? (PPP)

Answer 34

Is a public/private service that is funded through a partnership of public and private sector firms

Question 35

What is a private finance initiative? (PFI)

Answer 35

The government becomes an enabler rather than a provider

Question 36

What is equality?

Answer 36

How equal something is

Question 37

What is equity?

Answer 37

How fair something is

Question 38

What is horizontal equity?

Answer 38

Same treatment to everyone

Question 39

What is vertical equity?

Answer 39

Unequal treatment of unequals

Question 40

What is relative poverty?

Answer 40

When the income is less than the average by a certain amount

Question 41

What is absolute poverty?

Answer 41

When the income is below a certain level necessary to maintain a minimum standard of living

Question 42

What is the poverty trap?

Answer 42

When low income households have disincentives to work because of the tax/benefit system

Question 43

What are the causes of poverty? (3)

Answer 43

Income inequality Inheritance Falling value of state benefits

Question 44

What are the effects of poverty? (3)

Answer 44

Poor education Poor health Low living standards

Question 45

What are some of the policies the government may use to try and reduce poverty? (3)

Answer 45

Reduce unemployment Progressive taxes Increase the national minimum wage

Question 46

What is cost benefit analysis?

Answer 46

A method of decision making that takes into account of external as well as private costs and benefits