How governments intervene with intervention examples Flashcards
What are seven market failures that fail to achieve social efficiency
Public goods Common resources Market power Imperfect information Immobility of factors and time lags Protecting people’s interests Externalities
What are eight forms of market intervention
Taxes and Subsidies Changes in Property rights Legal restrictions Regulatory Bodies Price controls Provision of information Direct provision Public ownership
When do we use taxes and how do they work to bring production to a socially efficient level
When MSC is lower than MC We want to bring MSC and MC into alignment to be socially efficient
We close the gap with a tax
Level of production we want is lower than the current production levels
The producer doesn’t incur any costs but the consumer is seeing a higher cost
Ex: Smoking
When do we use subsidies and how do they work to bring production to a socially efficient level
MSC is higher than MC so We want to produce more of the good than the market will supply
Making a payment to reduce the cost to the firm so thereby they increase the overall quantity they produce
Ex: Afforestation grant 2014- 2020
What would be the optimum subsidy to close the gap between MC and MSC
MC-MSC
What would be the optimum tax to close the gap between MC and MSC
MSC-MC
What are advantages to taxes and subsidies
Forces firms or consumers to take on board full social cost
Adjustable to the magnitude of the problem - can be scaled to address changes you want made
Long-run incentives
What are disadvantages to taxes and subsidies
Infeasible to apply different tax/subsidy rates - In practice cannot do this. Cannot narrowly target certain products ex: instead of taxing alcoholic drinks individually according to alcohol content there’s a tax on all alcohol
Lack of knowledge
What are property rights
They define who owns the property, to what uses it can be put, the rights other people (external) have over it and how it may be transferred. How the government defines who owns what basically.
Why is this a market failure and how is there intervention
Changes in property rights allow some externalities to be dealt with but it’s not commonly changed in practice as a tool for intervention not really used.
When sufferers from externalities do deals with perpetrators (e.g. levying fines), the externality will be internalised and the socially efficient level of output will be achieved
However in practice property rights are somewhat skews to wealthier in society so there is a power there
What does legislation mean
Prohibit/regulate behaviour that imposes external costs
Prevent firms from providing false/misleading information - rules that require the provision of certain information
Prevent/regulate monopolies or oligopolies
What are the advantages of legislation and legal restrictions
Simple/clear - black and white
Deal with dangerous situations
Speed - Can be put in place very quickly
Address imperfect information
What are the disadvantages of legislation and legal restrictions
Blunt measures - May cause overcorrection/overreaction.
Do not give continuous incentive for action always as people will do minimum they have to
Give an example of price controls in practice and the social outcome they want to achieve
Ex: minimum alcohol pricing -m social outcome to lower level of alcohol consumption
What is direct provision
government prefer to directly provide a good to the public
What are the reasons for direct provision
Social justice
Large positive externalities
Dependents
Ignorance - people dont know what’s good for them
What are the drawbacks of intervention
Shortages and surpluses Poor information Bureaucracy and inefficiency Lack of market incentives Shifts in government policy Voter ignorance Unrepresentative government Lack of individual freedom
What are the advantages of a free market
Automatic adjustments - more responsive than the government. Easy communication between supply and demand
Dynamic adjustments - Innovation and research and development
The high degree of competition
What views does the virtue matrix take on corporate social responsibility
- Response to law
- response to social norms
- Socially beneficial and potentially profitable
- Socially beneficial and unprofitable
Why doe firms engage in CSR
Improved economic performance - good business and they perform better
Enhancing the brand
Attracting and retaining employees
Access to capital
How to shadow markets develop and why
If a government intervenes, a price ceiling can come into effect
All things being equal we will see a shortage emerge when this happens
There is a larger consumer surplus with a price ceiling in place
If people don’t get goods and services at the government price they will go elsewhere to get the goods or service and be willing to pay a massive price for it.
This can be known as the shadow market
Why is the a shortage in some direct provision of services
Provision of services at zero cost - ex: healthcare
Supply is fixed - certain number of beds etc
At zero cost demand will be higher than supply for healthcare - shortage is evident
Explain prohibition
Something that is legal and then is made illegal
What happens to the demand and supply of a good that is prohibited
Left shift in demand curve. Reduces overall as people will obey the law but there will still be some demand
Likewise supply will shift left - probably a larger shift left than demand as legal penalties are more severe for suppliers rather than consumers
Why might there be a need for government intervention in insurance
Inversion of the product cycle- value of the product is taken away from me when you take out the insurance. Intervention ensures these promises are met
Absence of a sophisticated claim holder - hard for policyholders to see what they are getting for their money. How can they be assured of payout?
What are the market failures of insurance industry
Externaltities: Insurance compensation fund funding and may require loans, financial stability of the market also as there is an interconnectedness
Consumers assessment of claim paying ability - Financial strength and liabilities
Protecting people’s interest - Underutilisation of retirement savings. Savings as merit goods
Why is the interconnectedness of the insurance industry important to note
refers to the fact that the failure of one insurer leads to the failure of another - you may be affected by interconnectedness of insurance companies
What are the 3 key stages in your time saving for retirement
Saving
Growth
Taking money out of it
What taxes can be claimed at each of the three stages of saving for retirement
TEE - Taxed, Exempt, Exempt
ETT - Exempt, Taxed, Taxed
EET - Exempt, Exempt, Taxed
Explain TEE - Taxed, Exempt, Exempt on retirement savings
where contributions must be paid out of taxed income (net salary), but neither investment returns nor benefits are in principle subject to tax. - make pension contributions out of net salary
Explain ETT - Exempt, Taxed, Taxed on retirement savings
where contributions can be paid out of untaxed income (gross), but where both investment returns and benefits are subject to tax (more saving initially but returns are taxed.
Explain EET - Exempt, Exempt, Taxed on retirement savings
where neither contributions nor investment returns are subject to tax, but where benefits are
Explain user pays
User Pays is a common way to deal with an externalities- correct the externality by applying an appropriate tax
ex: carbon tax
Explain transition risk in respective of climate change aims
impact on prices and values that will come across due to a change to a low carbon economy with a move in policy. Transition to renewables is positive for wind farm for example but sudden changes can be detrimental to business models
Explain the challenges of climate change
Tragedy of the horizons - timing of this resources - looking long term
Price stability weather shocks - household insurance prices
Price stability low carbon transition - is businesses are carbon heavy businesses
Financial stability
