Govt. Intervention in Markets Flashcards
Nationalisation
Refers to the process of taking an industry into public ownership.
Pros of Nationalisation (4)
Greater Economies of Scale
Greater focus on services that benefit society - AE
Less likely to externality market failure
Macroeconomic Control - ie. change wages to control inflation + Unemployment in the Public sector.
Cons of Nationalisation (7)
Risk of Diseconomies of Scale
Lack of incentive to be efficient - X-inefficiency
Lack of supernormal profits - no profit motive / no dynamic efficiency
Expensive to run - burden on tax payers / opp. cost
Low Competition - higher prices
Moral Hazard
Interference of politics
Evaluation of Nationalisation (5)
Cost vs benefit - which is greater ?
Would a public private partnership (ppp) be better ?
Regulation could be better than nationalisation ?
How much competition is in the private sector ?
Size of firm, how big is their current EoS ?
Privatisation
When state run organisations / activity is sold off to the private sector.
Pros of Privatisation (5)
Allocative Efficiency
Reduces X-Inefficiency
Introduction of profit motive
Supernormal Profits - Innovation / dynamic efficiency
Reduced Govt. spending / opp. cost
Cons of Privatisation (4)
Reduced access to services - excludability
Job cuts - to resolve X-inefficiency
Profit Objective rather than social welfare
Reduced quality to increase profits
Evaluation of Privatisation (2)
Level of competition in new market ?
Regulation
Regulation Definition
Rule or Law enforced by the government that must be followed by economic agents to encourage a change in behaviour
Aims of Regulation (3)
Protect the interests of consumers
Greater Choice
Lower price
Types of Regulation (4)
Bans - eg. Smoking in public
Limits - eg. age limits of alcohol
Caps - Emission’s caps for firms
Compulsory - Vaccinations
How are regulations controlled ? (2)
Enforcement - Police
Punishment - Fines
Advantages of Regulation (3)
If command / control = strong, incentive to change behaviour towards socially optimal level is strong.
Solves issues in the free-market, non-market solution
Allocative Efficiency / Welfare Gain
Disadvantages of Regulation (4)
High costs - admin + enforcement
Too strict - increasing firms costs significant / shut down
Black markets may arise
Inequitable for some firms.
Deregulation
When Govt. reduce legal barriers to entry to incentivise new firms to enter the market
Advantages of Deregulation (6)
More firms enter the market - increase choice /Con Surp
Competition - lower prices / greater efificiency
Allocative efficiency - P = MC
Productive Efficiency increase
X-Inefficiency reduces
Increased Dynamic Efficiency - supernormal profits
Disadvantages of Deregulation (4)
Loss of Natural monopoly - waste of resources - allocative inefficiency
Increased Average costs
Loss of EoS benefit
Formation of local monopolies
Evaluation of Deregulation (4)
SR vs LR - Increasing market contestability ?
Other barriers - not just legal barriers eg. technical
Govt. regulation ?
Govt. Information ?
Regulatory Capture
When regulators start acting in the interests of the company, due to asymmetric information, rather than in consumer interests.
Arguments for Govt. Intervention in Markets (4)
Provide public / merit goods which are not supplied by private sector
Reduce inequality / poverty by redistribution wealth
Protection of workers / environment
Limit monopoly power
Pros of Govt. Intervention in Markets (4)
Provide public / merit goods which are not supplied by private sector
Reduce inequality / poverty by redistribution wealth
Protection of workers / environment
Limit monopoly power
Cons of Govt. Intervention in Markets (4)
Govt. Failure
Lack of efficiency / profit motive
Govt. infleuenced by pressure groups / politics
Limits innovation
Tools of Govt. Intervention (7)
Indirect Tax
Subsidies
Price Controls
State Provision
Regulation
Extention of Property Rights
Pollution Permits
Indirect Tax (defintion + aims)
An expenditure tax which increases the cost of production for firms, however this cost can be transferred to consumers via higher prices.
Resolve Market Failure
Govt. Revenue
Types of Indirect Tax
Ad Valorem
Specific
Pros of Indirect Tax (3)
Govt. Revenue
Promote Allocative Efficiency
Internalises externality
Cons of Indirect Tax (3)
Regressive
Potential for inflation - inelastic PED
Black Markets may arise
Evaluation of Indirect Tax (2)
PED ?
Correct Level of Taxation ?
Subsidies
A money grant given to producers in order to lower the costs of production and increase supply.
Advantages of Subsidy (4)
Increased supply - lower prices / increased quantity
Solves under production/consumption
Allocative Efficiency
Welfare Gain
Disadvantages of Subsidy (4)
High costs
Opportunity cost on Govt. budget
Misuse of subsidy
Consumption may not increase - Inelastic PED
Evaluation of Subsidy (3)
Size of Subsidiy ?
PED ?
How firms use subsidy ?
Advantages of Max. Prices (5)
Max. price set below market - reduced price
Resolve underconsumption
Allocative Efficiency
Prevent consumers from being exploited by producers
Increase competition
Disadvantages of Max. Prices (4)
Can lead to shortages - Black Markets
High Enforcement Cost
Max. price that is too high - consumers still exploited
Firms shut down / move abroad
Demand > Supply = Shortage
Evaluation of Max. Price (5)
Shortage ?
Black Markets ?
Enforcement ?
Setting the right level ?
Cost ?
Advantages of Min. Price (3)
Reduces over-consumption
Protects producers - eg. farmers
Allocative Efficiency
Disadvantages of a Min. Price (3)
Creates surplus of product - Demand < Supply
Higher prices for consumers
Govt. have to buy excess supply
Evaluation of Max. Prices (4)
PED ?
Regressive ?
Correct Level ?
Black Markets ?
Direct Govt. Provision
Where the Government provide goods + services (usually merit goods) for free / largely free to increase social welfare.
Advantages of Govt. Provision (3)
Long-term benefits - eg. education / improve HCI
Reduce wealth inequality
Redistribute income
Disadvantages of Govt. Provision (4)
Low Efficiency - no profit motive
Cannot use price mechanism to determine what to produce.
Opportunity Costs
Over-reliance / Free-rider problem
Pollution Permits
The Government determine an optimal level of emissions in a given period and allocate permits allowing firms to pollute a certain amount.
Advantages of Pollution Permits (4)
Encourage Firms to be efficient / reduce pollution
Promote low emmission innovtion
Internalise the externality of pollution
Permits can be traded - price mechanisms
Disadvantages of Pollution Permits (3)
Difficult to determine an optimal level of pollution
Creates a new market - potential for failure
Admin / Enforcement costs
Advantages of extending property rights (4)
Property rights owner can charge for pollution
Negative Externality is internalised
Money raised can be used for innovation
Reduce environmental costs.
Disadvantages of extending property rights (4)
Difficult to allocate property rights, eg. water / air
Externalities can be felt across multiple nations
High enforcement/admin costs
Difficult to trace the polluter.
Govt. Failure definition
When Govt. intervention leads to a misallocation of resources and a misallocation of resources occurs.
Key causes of Govt. Failure (7)
Bureaucracy
Conflicting Govt. objectives
Asymetric Info
Admin Costs
Regulatory Capture
Time lag
External Shocks
