Micro 11 - Government Intervention in markets 1: State provision of public goods, information provision and regulation

Question 1

Define the term ‘State provision’

Answer 1

State provision refers to the government directly providing a good or service funded from general tax revenue

Question 2

Why are public goods often state provided by the government?

Answer 2

As individual producers and consumers lack an incentive to provide them as public goods will benefit others whom have not paid for their provision

Question 3

What type of goods are usually state provided?

Answer 3

Public goods

Question 4

Where are the two main places state provision can come from?

Answer 4

State provision can come directly from the government or alternatively governments can purchase the good or service from the private sector and provide it to the public for free

Question 5

What is state provision a method of?

Answer 5

State provision is a method of overcoming market failure

Question 6

What is the relationship between state provision and market failure?

Answer 6

State provision is a way of solving market failure

Question 7

Why do important public goods need to be state provided?

Answer 7

As individual producers and consumers lack an incentive to provide them as public goods will benefit others whom have not paid for their provision therefore the state will need to provide them instead

Question 8

What are the advantages of state provision?

Answer 8

• Governments might state provide goods with positive externalities to increase their consumption
• Free provision of services can help to reduce inequalities in access
• State provision can redistribute income as most of the money to pay for the services comes from taxing wealthier citizens

Question 9

What are the disadvantages of state provision?

Answer 9

1- State provision may mean there’s less incentive to operate efficiently due to the absence of the price mechanism
2- State provision may fail to respond to consumer demands as it lacks the motive of profit to determine what’s supplied
3- The opportunity cost of state provision of a good or service is that other goods or services can’t be supplied
4- State provision can reduce individual’s self reliance as they know the good or service is there for them if they need it
5 - As the government does not have a profit motive, it may be less efficient at providing public goods than the private sector would be

Question 10

Define the term ‘Information provision’

Answer 10

Information provision refers to providing information to help economic agents make decisions that reduce market failure

Question 11

What methods might the government use to give consumers and produces information?

Answer 11

• TV advertisements
• Billboards
• Letters / Leaflets

Question 12

How can information gaps cause market failure?

Answer 12

Information gaps cause market failure as consumers do not know the true benefits or costs of consuming a good or service

Question 13

What are the two reasons why the government may provide information?

Answer 13

• The government may provide information to encourage consumption and production of goods and services that are beneficial to individuals and / or society
• The government may provide information to discourage the consumption and production of goods or services that are harmful to individuals and / or society

Question 14

What are the two reasons why the government need to provide information in the first place?

Answer 14

• To inform economic agents of the benefits of consuming or producing a product
• To inform economic agents of the harm of consuming or producing a product

Question 15

How does information provision affect the consumption of goods associated with positive externalities?

Answer 15

Information provision causes demand to rise as consumers now realise the private benefits are higher than they originally thought. This should help combat any previous underconsumption

Question 16

How does information provision affect the consumption of goods associated with negative externalities?

Answer 16

Information provision causes demand to fall as consumers now realise the private benefits are lower than they initially thought. This should help to combat any previous overconsumption

Question 17

Draw a S&D and an externality diagram showing how information provision can help address underconsumption

Answer 17

Check page 5 in pack 11

Question 18

Draw a S&D and an externality diagram showing how information provision can help address overconsumption

Answer 18

Check page 5 in pack 11

Question 19

What are the advantages of information provision?

Answer 19

• Information provision does not directly interfere with the market mechanism allowing market forces to determine the market price and quantity

Question 20

What are the advantages of information provision?

Answer 20

• Information provision does not directly interfere with the market mechanism allowing market forces to determine the market price and quantity
• Information provision alters consumer demand and therefore improves allocative efficiency

Question 21

What are the advantages of information provision?

Answer 21

• Information provision does not directly interfere with the market mechanism allowing market forces to determine the market price and quantity
• Information provision alters consumer demand and therefore improves allocative efficiency
• Information provision may be cheaper and easier than other methods to reduce market failure, i.e. has a lower opportunity costs for the government compared to subsidies

Question 22

What are the disadvantages of information provision?

Answer 22

• Because information provision does not force the change in consumer behaviour, the information may be ignored or too difficult to understand for some consumers

Question 23

What are the disadvantages of information provision?

Answer 23

• Because information provision does not force the change in consumer behaviour, the information may be ignored or too difficult to understand for some consumers
• Some consumers may already be aware of the information but choose to ignore this and act irrationally
• It is difficult to target the correct groups with the information
• Providing information will increase government costs and create an opportunity cost for the money spent to deliver the information

Question 24

What may the effectiveness of information provision depend on?

Answer 24

• Whether the right people are targeted
• Whether people understand the message
• Whether people ignore the information and continue to behave irrationally
• The size of the information gap
• Whether people are able to act upon the message

Question 25

Define the term ‘regulation’

Answer 25

Regulations are rules that are enforced by an authority and they are usually backed up with legislation. They can be used to influence the behaviour of consumers and producers to try and change their undesirable behaviour

Question 26

What is the relationship between regulations and market failure?

Answer 26

Regulations are used to try and reduce market failure and its impacts

Question 27

What are some of the ways regulations can reduce market failure?

Answer 27

• Regulations can reduce the power of monopolies
• Regulations can provide some protection for consumers and producers from problems arising from asymmetric information

Question 28

What are the advantages of regulations?

Answer 28

• Most rules are fairly easy and clear to understand
• Regulations can help overcome information failure by making an activity compulsory or illegal
• They can target the externality directly
• Regulations can fine those causing external costs in order to compensate the third party. This will internalise the externality

Question 29

What are the disadvantages of regulations?

Answer 29

• It can be difficult for a government to work out what is correct
• There is a need for regulation in some areas to be worldwide rather than in just one country
• Following excessive regulations can be expensive and may force firms to close or to move to a different country
• Monitoring compliance with regulations can be expensive for a government and if the punishment for breaking regulations isn’t harsh enough then they may not be a deterrent and change behaviours