government intervention to correct market failure

Question 1

What are the main forms of Government Intervention?

Answer 1

-Indirect Taxation
-Subsidies
-Provision of Information
-State Provision
-Regulation
-Tradable pollution permits 
-Extension of property rights

Question 2

Define Indirect taxation?

Answer 2

tax on consumer expenditure

Question 3

Market failures corrected by Indirect taxation?

Answer 3

overconsumption

Question 4

Examples of indirect taxation?

Answer 4

-Fuel
-Liquor
-Cigarettes

Question 5

Analysis and effects of indirect taxation?

Answer 5

-The tax imposed should equal the value of the negative externality.
-The producer is required to pay the tax in full, which therefore takes into account the negative externality.
-The supply curve shifts to the left, and the social optimum is achieved

Question 6

Positives of Indirect taxation?

Answer 6

-The polluter pays, leading to a socially efficient outcome
-Raises substantial tax revenue for the government and helps fund public or merit goods
-It is a market solution to the problem of the negative externality

Question 7

Negatives of indirect taxation?

Answer 7

• It is difficult to calculate accurately the tax required to correct the negative externality.

• Producers may be able to pass on the tax to consumers if demand is price inelastic, thus, output will not really be reduced.


-Higher prices may be inflationary and reduce competitiveness of the country


-Administrative costs involved
-Taxes in one country may force business to relocate to another, which could lead to unemployment


-Tax evasion


-No overall cap on emissions

Question 8

Define subsidy?

Answer 8

A payment, usually from the government to encourage production or consumption of a product

Question 9

Market failures corrects from subsidies?

Answer 9

under production

Question 10

Examples of subsidies?

Answer 10

-Universities
-Farming
-Transport services


Question 11

Analysis and effects of subsidies?

Answer 11

-The subsidy encourages producers to produce more reducing production costs.


-The supply curve shifts to the right and the positive externality is corrected. And the output achieved will be the social optimum.


-The size of the subsidy should equal the size of the positive externality

Question 12

Positives of Subsidies?

Answer 12

-Reduce pollution levels


-Increase choice for consumers


-May increase employment

Question 13

Negatives of subsidies?

Answer 13

• High cost on government 

• May lead to money diverted away from other items


-Companies may become too reliant on government support and they may not try to improve their efficiency


-Long time to implement

Question 14

What does effect of subsidies depend on?

Answer 14

-Size of subsidy


-Elasticity of demand

Question 15

Define Provision of Information?

Answer 15

Providing information about goods and services

Question 16

What market fairies does provision of information correct?

Answer 16

• Over consumption


- Underconsumption

Question 17

Examples of provision of information?

Answer 17

• Health warnings on cigarette packages 

• NHS leaflets 

• Government adverts and campaigns

Question 18

Analysis and effects if provision of information?

Answer 18

-It will discourage people to overconsume demerit goods, thus correcting the negative externality and achieve the social optimum


-It will also encourage people to consume merit goods, thus correcting the positive externality and achieving the social optimum

Question 19

Positives of Provision of information?

Answer 19

Easy to use with other government interventions

Question 20

Negatives of provision of information?

Answer 20

-Difficult to implement, may be opposition

-Can be expensive

-Slow

Question 21

What does the effect of provision of information depend on?

Answer 21

-How many people see it

Question 22

Define state provision?

Answer 22

-The provision or supply of something from the state

Question 23

Market failures corrected by state provision?

Answer 23

under consumption

Question 24

Examples of state provision?

Answer 24

-Free milk


-NHS


-Transport


-Healthy foods

Question 25

Analysis of effects of state provision?

Answer 25

-The state will provide merit goods winch will correct the positive externalities and will achieve the social optimum

Question 26

Negatives of state provision?

Answer 26

-Expensive

Question 27

Define Regulation?

Answer 27

Regulation is the setting of laws, standards and controls to influence production and/or consumption to correct failure

Question 28

Market failures corrected by regulation?

Answer 28

• Over consumption


- Overproduction

Question 29

Examples of regulation?

Answer 29

Health and safety standards
-Age restrictions 
-Wage restrictions

Question 30

Positives of regulation?

Answer 30

-Sets clear standards that are easy to understand
-Instant effect 
-Backed by the law

Question 31

Negatives of regulation?

Answer 31

-Difficult to set the correct standards 
-Costs of policy and enforcement
-Avoidance and evasion
-Poorly targeted 
-Can detract foreign investors and business and make them go to less regulated countries, which could lead to unemployment

Question 32

Effect of regulation depends on?

Answer 32

-The more you regulate the more you have to police

-Size of regulation

-If the amount of policing is worth the regulation

Question 33

Define tradable pollution permits?

Answer 33

A permit which allows the owner to emit a certain amount of pollution and which can be sold to another polluter if it is not required

Question 34

Examples of tradable permits?

Answer 34

-EUETS (EU Emissions Trading System)

Question 35

Positives of tradable permits?

Answer 35

-The polluter pays


-Encourages firms to improve production methods


-Permits are traded between polluters and in theory requires minimal monitoring


-Overall level of pollution can be controlled and the permits can be reduced


-Can be used among many countries