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Microeconomics > Govt. Intervention in Markets > Flashcards

Govt. Intervention in Markets Flashcards

1
Q

Nationalisation

A

Refers to the process of taking an industry into public ownership.

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2
Q

Pros of Nationalisation (4)

A

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.

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3
Q

Cons of Nationalisation (7)

A

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

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4
Q

Evaluation of Nationalisation (5)

A

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 ?

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5
Q

Privatisation

A

When state run organisations / activity is sold off to the private sector.

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6
Q

Pros of Privatisation (5)

A

Allocative Efficiency
Reduces X-Inefficiency
Introduction of profit motive
Supernormal Profits - Innovation / dynamic efficiency
Reduced Govt. spending / opp. cost

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7
Q

Cons of Privatisation (4)

A

Reduced access to services - excludability
Job cuts - to resolve X-inefficiency
Profit Objective rather than social welfare
Reduced quality to increase profits

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8
Q

Evaluation of Privatisation (2)

A

Level of competition in new market ?
Regulation

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9
Q

Regulation Definition

A

Rule or Law enforced by the government that must be followed by economic agents to encourage a change in behaviour

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10
Q

Aims of Regulation (3)

A

Protect the interests of consumers
Greater Choice
Lower price

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11
Q

Types of Regulation (4)

A

Bans - eg. Smoking in public
Limits - eg. age limits of alcohol
Caps - Emission’s caps for firms
Compulsory - Vaccinations

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12
Q

How are regulations controlled ? (2)

A

Enforcement - Police
Punishment - Fines

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13
Q

Advantages of Regulation (3)

A

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

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14
Q

Disadvantages of Regulation (4)

A

High costs - admin + enforcement
Too strict - increasing firms costs significant / shut down
Black markets may arise
Inequitable for some firms.

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15
Q

Deregulation

A

When Govt. reduce legal barriers to entry to incentivise new firms to enter the market

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16
Q

Advantages of Deregulation (6)

A

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

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17
Q

Disadvantages of Deregulation (4)

A

Loss of Natural monopoly - waste of resources - allocative inefficiency
Increased Average costs
Loss of EoS benefit
Formation of local monopolies

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18
Q

Evaluation of Deregulation (4)

A

SR vs LR - Increasing market contestability ?
Other barriers - not just legal barriers eg. technical
Govt. regulation ?
Govt. Information ?

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19
Q

Regulatory Capture

A

When regulators start acting in the interests of the company, due to asymmetric information, rather than in consumer interests.

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20
Q

Arguments for Govt. Intervention in Markets (4)

A

Provide public / merit goods which are not supplied by private sector

Reduce inequality / poverty by redistribution wealth

Protection of workers / environment

Limit monopoly power

21
Q

Pros of Govt. Intervention in Markets (4)

A

Provide public / merit goods which are not supplied by private sector

Reduce inequality / poverty by redistribution wealth

Protection of workers / environment

Limit monopoly power

22
Q

Cons of Govt. Intervention in Markets (4)

A

Govt. Failure

Lack of efficiency / profit motive

Govt. infleuenced by pressure groups / politics

Limits innovation

23
Q

Tools of Govt. Intervention (7)

A

Indirect Tax
Subsidies
Price Controls
State Provision
Regulation
Extention of Property Rights
Pollution Permits

24
Q

Indirect Tax (defintion + aims)

A

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

25
Q

Types of Indirect Tax

A

Ad Valorem
Specific

26
Q

Pros of Indirect Tax (3)

A

Govt. Revenue
Promote Allocative Efficiency
Internalises externality

27
Q

Cons of Indirect Tax (3)

A

Regressive
Potential for inflation - inelastic PED
Black Markets may arise

28
Q

Evaluation of Indirect Tax (2)

A

PED ?
Correct Level of Taxation ?

29
Q

Subsidies

A

A money grant given to producers in order to lower the costs of production and increase supply.

30
Q

Advantages of Subsidy (4)

A

Increased supply - lower prices / increased quantity
Solves under production/consumption
Allocative Efficiency
Welfare Gain

31
Q

Disadvantages of Subsidy (4)

A

High costs
Opportunity cost on Govt. budget
Misuse of subsidy
Consumption may not increase - Inelastic PED

32
Q

Evaluation of Subsidy (3)

A

Size of Subsidiy ?
PED ?
How firms use subsidy ?

33
Q

Advantages of Max. Prices (5)

A

Max. price set below market - reduced price
Resolve underconsumption
Allocative Efficiency
Prevent consumers from being exploited by producers
Increase competition

34
Q

Disadvantages of Max. Prices (4)

A

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

35
Q

Evaluation of Max. Price (5)

A

Shortage ?
Black Markets ?
Enforcement ?
Setting the right level ?
Cost ?

36
Q

Advantages of Min. Price (3)

A

Reduces over-consumption
Protects producers - eg. farmers
Allocative Efficiency

37
Q

Disadvantages of a Min. Price (3)

A

Creates surplus of product - Demand < Supply
Higher prices for consumers
Govt. have to buy excess supply

38
Q

Evaluation of Max. Prices (4)

A

PED ?
Regressive ?
Correct Level ?
Black Markets ?

39
Q

Direct Govt. Provision

A

Where the Government provide goods + services (usually merit goods) for free / largely free to increase social welfare.

40
Q

Advantages of Govt. Provision (3)

A

Long-term benefits - eg. education / improve HCI
Reduce wealth inequality
Redistribute income

41
Q

Disadvantages of Govt. Provision (4)

A

Low Efficiency - no profit motive
Cannot use price mechanism to determine what to produce.
Opportunity Costs
Over-reliance / Free-rider problem

42
Q

Pollution Permits

A

The Government determine an optimal level of emissions in a given period and allocate permits allowing firms to pollute a certain amount.

43
Q

Advantages of Pollution Permits (4)

A

Encourage Firms to be efficient / reduce pollution
Promote low emmission innovtion
Internalise the externality of pollution
Permits can be traded - price mechanisms

44
Q

Disadvantages of Pollution Permits (3)

A

Difficult to determine an optimal level of pollution
Creates a new market - potential for failure
Admin / Enforcement costs

45
Q

Advantages of extending property rights (4)

A

Property rights owner can charge for pollution
Negative Externality is internalised
Money raised can be used for innovation
Reduce environmental costs.

46
Q

Disadvantages of extending property rights (4)

A

Difficult to allocate property rights, eg. water / air
Externalities can be felt across multiple nations
High enforcement/admin costs
Difficult to trace the polluter.

47
Q

Govt. Failure definition

A

When Govt. intervention leads to a misallocation of resources and a misallocation of resources occurs.

48
Q

Key causes of Govt. Failure (7)

A

Bureaucracy
Conflicting Govt. objectives
Asymetric Info
Admin Costs
Regulatory Capture
Time lag
External Shocks

Microeconomics (11 decks)

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