Government intervention in the market Flashcards
market failure d
where the free market fails to achieve an efficient allocation of resources
productive inefficiency d
when firms are not producing at minimum possible average total costs
allocative inefficiency d
when resources are not used to produce the goods and services wanted by consumers
fiscal policy d
the use of government spending and taxation to meet economic objectives
government failure d
when government intervention to correct market failure does not improve the allocation of resources or leads to a worsening of the situation
what are possible causes of market failure
externalities
merit and demerit goods
public goods
what are the possible methods of government intervention in markets
legislation and regulation
provision of goods and services
fiscal policy
information provision
what are the main causes of government failure
political self-interest
imperfect information
unintended consequences
regulatory capture
negative externalities d
negative spillover effects to third parties not involved with the consumption or production of the good
when do negative externalities occur
when there is a divergence between private costs and social costs
how do you show negative externalities on a graph
MSC to the left of MPC
how do you show the external costs of something like noise pollution on a diagram
vertical distance between two cost curves
what type of inefficiency occurs when there are externalities
allocative because socially optimal quantity is not being produced
how do you show welfare loss on MSC MSB diagram
the equilibrium point, vertically above and then to the other equilibrium point
what are the distributional effects associated with environmental externalities
there are inequalities between those who contribute to global warming and those who suffer from it
how could distributional effects be resolved
tax on the output of industrialised nations, with the revenue used to compensate citizens of developing nations for their welfare loss
what is an example of an environmental tax
the congestion charge in central London
what are the two types of economic measure to correct environmental market failure
market-based measures
government regulation
what is the purpose of environmental taxation
to ‘internalise’ any negative externality by increasing the private cost of production
how large is the tax for environmental taxation
vertical difference between the MPC and MSC
what are some problems involved with using environmental taxation
difficult to place monetary value on externalities
if demand inelastic it may only reduce output slightly
how does pollution regulation work
government regulates the level of output and pollution in the market and can fine firms
problem with pollution regulation
expensive and difficult to enforce
doesn’t generate tax resources
tragedy of the commons d
the over-exploitation of natural resources that are not owned by single individuals or organisations
