Government Intervention- Theme 1 Flashcards
What is the key reason for government intervention in markets?
Often the government intervenes when there’s market failure and attempts to correct this so that resources are allocated more efficiently.
Wha measures could a government undertake to correct market failure?
- indirect taxation
- subsidies
- maximum and minimum prices
- trade pollution permits
- regulation
- provision of public goods
- provision of market information
Advantages of indirect taxes to correct market failure.
- tax funds are raised for the government, which can be used to clean up the environment or to compensate victims of pollution.
- difficult to evade as often included in market price.
- convenient, since tend to be paid in small amounts and regularly rather than in one lump sum.
Disadvantages of indirect taxes to correct market failure.
- increase cost of production, making firms less competitive than firms in other countries where such taxes are not applied.
- widespread use of indirect taxes may be inflationary.
- illegal markets may develop.
Advantages of subsidies applied to renewable energy markets.
- can reduce air pollution and other forms of external costs.
- can promote sustained economic growth.
- rate of consumption of non-renewable energy resources is reduced.
Disadvantages of subsidies applied to renewable energy markets.
- there is an opportunity cost to government subsidies, they may lead to higher taxes or cuts in government spending elsewhere.
- difficult to quantify external benefits and then place a monetary value on them, consequently, the social optimum position might not be achieved.
- wind and solar power may be less reliable than traditional fossil fuels.
Define maximum price.
A ceiling price set by the government on a good or service, above which it cannot rise. It may be enforced through government legislation.
Why might a government impose a maximum price in the house rental market?
To protect tenants from being exploited by landlords.
Advantages of maximum prices.
- They can reduce exploitation of consumers, especially where a lack of competition exists.
- reduce inequality, as in the case of a salary cap on highly paid public sector workers and bankers.
- help people on low incomes to afford key products.
Disadvantages of maximum prices.
- unintended consequences might occur. E.g. government intervention distorts the price mechanism, leading to an excess demand and inefficient allocation of resources.
- problems arise over how to allocate supply to meet excess demand in market, since price cannot increase. May involve first-come, first-served basis or sellers’ preference. Both deemed unfair.
- difficult for government to monitor and enforce maximum price controls in markets.
Define a minimum price.
A floor price set by the government on a good or service, below which it cannot fall. It may be enforced through government legislation.
Define guaranteed minimum price.
Where surplus output created is purchased by a government agency at the minimum price. The main aim is to protect producer incomes.
Advantages of minimum prices.
- national minimum wage can reduce exploitation of labour while increasing incentives to work.
- can reduce consumption of goods which are harmful to consumers and have high external costs, such as alcohol and sugar.
- guaranteed minimum price can stabilise and increase producer incomes, leading to greater investment and employment.
Disadvantages of minimum prices.
- less effective in reducing consumption of alcohol and sugary drinks when demand is price inelastic.
- guarantee minimum price scheme leads to government buying up surpluses, which involves an opportunity cost, may raise tax or cut government spending.
- national minimum wage may cause unemployment among workers in low-skilled labour markets.
What are tradable pollution permits?
Pollution permits that can be bought and sold in the market. They are an attempt to solve problem of pollution by creating a market for it.
