Government intervention in the market

Question 1

What is market failure?

Answer 1

Where the free market fails to achieve an efficient allocation of resources

Question 2

What are the causes of market failure? (8) (PNMDPIIE)

Answer 2

Positive externalities 
Negative externalities 
Merit good 
Demerit good 
Public good
Imperfect competition 
Immobility of factors of production 
Equity issues, including poverty and inequality

Question 3

What is productive inefficiency?

Answer 3

When firms do not produce at the minimum average cost

Question 4

What is allocative inefficiency?

Answer 4

When resources are not used to produce the goods and services wanted by consumers

Question 5

What are the moethods a government can use to correct market failure? (4)

Answer 5

Regulation and legislation
Direct provision of goods and services
Taxation and subsidies
Improving the quality and quantity of information

Question 6

What is government failure?

Answer 6

When government intervention does not correct market failure, leads to a worsening of the situation

Question 7

What are the types of government failure? (4)

Answer 7

Political self interest
Imperfect information
Unintended consequences
Regulatory capture

Question 8

Does the triangle on a negative externalities graph point towards or away from the axis?

Answer 8

Towards

Question 9

What are the methods used to correct environmental market failure?

Answer 9

Market based measures

Government regulation

Question 10

How do market based measures correct environmental market failure?

Answer 10

Designed to modify the price mechanism

Question 11

How do government regulations correct environmental market failure?

Answer 11

Designed to create incentives to change a firms behaviour

Question 12

What is environmental taxation?

Answer 12

A tax placed on a good or service which is deemed to have a negative impact on the environment

Question 13

What are the problems with environmental taxation? (3)

Answer 13

Difficult to place an accurate monetary value on the externalities
If demand in inelastic, output will only change slightly
May reduce international competitiveness

Question 14

What are pollution permits?

Answer 14

A right to emit a given volume of waste or pollution into the environment

Question 15

What is cost benefit analysis?

Answer 15

An investment appraisal technique that takes into account all the private and external costs and benefits of an economic decision

Question 16

What is a shadow price?

Answer 16

A price calculated to more accurately reflect the costs and benefits to society of a good

Question 17

What are the stages to cost benefit analysis? (4)

Answer 17

Identify all of the costs and benefits
Place a monetary value on the costs and benefits
Estimate costs and benefits over many years
Drawing together the data

Question 18

What are the limitations of CBA? (2)

Answer 18

Difficult to accurately put a value on public goods

May not fully reflect the distributional impacts pf investment projects