Government Policies to Correct Positive and Negative Externalities

Question 1

state some of the ways the government can intervene to correct market failure

Answer 1

• regulation
• legalisation
• indirect taxation
• grants and subsidies
• voluntary agreements

Question 2

regulation

Answer 2

• undertaken by the government to create competitive markets
• this will protect the interests of consumer so that they are not exploited by firms
• effective regulation will lead to greater choice and lower prices
• key reason for regulation: to create conditions for continued investment in infrastructure in important areas of the economy

Question 3

legalisation

Answer 3

• involves creating and enacting laws in order to protect individuals, firms and society as a whole

Question 4

indirect taxation

Answer 4

• the imposition of an indirect tax will lead to an increase in the costs of supply for a firm
• this will lead to a shift in the supply curve up and to the left
• quantity supplied will decrease and prices will increase
• the incidence of the tax paid is split between the consumer and producer
• the government is likely to increase indirect taxation on demerit goods and those with externalities

Question 5

grants and subsidies

Answer 5

• the provision of a grant or subsidy will lead to a decrease in the cost of supply for a firm
• this will lead to a shift in the supply curve down and to the right
• quantity supplied will increase and prices will decrease
• the subsidy will be shared between the consumer ad the producer
• the gov is likely to subsidise merit goods and those with positive externalities