GVMT Intervation To Markets and Government Failure

Question 1

Define minimum pricing

Answer 1

Minimum pricing is placing a price on something which the market price cannot legally go below

Question 2

Define maximum pricing

Answer 2

Maximum pricing is putting a price on something that the market price cannot legally go above

Question 3

Name 2 benefits of minimum pricing

Answer 3

1. Prevents negative externalities
2. Reduces consumption
3. Increase wages/incomes

Question 4

Name 2 negatives on minimum pricing

Answer 4

1. A tax on responsible consumers
2. The free market should be left alone
3. Costly to the GVMT to buy the surplus off the market
4. GVMT have to put tariffs on cheap imports which damages welfare of foreign firms

Question 5

Name 2 benefits of maximal pricing

Answer 5

1. Creates social equality
2. Encourages spending in other areas of the economy
3. Helps reduce monopoly power by allowing firms to compete

Question 6

Name 2 negatives with maximal pricing

Answer 6

1. Suppliers may reduce output due to lack of profit
2. Rich people get subsidised for no reason
3. Can cause black markets to arise

Question 7

What are pollution permits

Answer 7

A pollution permit is the quantity of pollution a polluting firm can pollute for free

Question 8

What happens if firms exceed their pollution permit

Answer 8

They get fined

Question 9

What happens when firms don’t use all their pollution permit

Answer 9

Firms can sell excess to other firms to increase income

Question 10

What are buffer stocks

Answer 10

Buffer stocks are the GVMT promising that prices of certain commodities remain stable

Question 11

Using wheat as an example, what does the GVMT do if their is a great harvest and supply meats demand and is over the maximum price

Answer 11

The GVMT buys stocks off the market to reduce the market price to/or below the maximum price

Question 12

Using wheat as an example, what does the GVMT do if their is a bad harvest and demand exceeds supply well below the minimum price

Answer 12

The GVMT supplies more into the market in order to more the price up to/above the minimum price

Question 13

Name 2 reasons for GVMT failure

Answer 13

1. Information gaps - politicians have little info about services
2. Inefficiency - public sector as not profit driven
3. Political interference - make decisions for short term gain and not long term gain
4. No consistency - constant changes in GVMT means there is different GVMT goals

Question 14

Name 2 ways in which GVMT failure can be overcome

Answer 14

1. Set performance targets
2. Employ private sector consultants to make decisions on cost cuts
3. Delegating certain decisions to non-political bodies (eg - intrest rates given to the MPC)