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
