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Microeconomics OMAR > Micro 23 - Alternative forms of government intervention. > Flashcards

Micro 23 - Alternative forms of government intervention. Flashcards

1
Q

Define regulation?

A

Laws imposed by the government.

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2
Q

why do governments impose regulations?

A

they are designed to overcome undesirable outcomes by over-riding the market mechanism .

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3
Q

how is regulation used to overcome healthcare problems (not trusting doctors) ?

A

Doctors need to be licensed and have a qualification.
Healthcare is a positive externality in consumption.
There is a lack of information- asymmetric information.

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4
Q

how is regulation used to overcome people not wearing seatbelt?

A
  • fines.
  • made it mandatory.
    There is information failure.
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5
Q

how is regulation used to overcome cigarette consumption?

A
  • Public smoking is banned.
  • No branding on product.
  • Advertising is banned.
  • Age restrictions.
    The is information failure, smoking has a negative externality.
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6
Q

how is regulation used to overcome third party harm form consumption of alcohol.

A
  • Need a license to buy drinks.
  • Cant buy under 18.
  • No drunk driving.
  • Banned in some areas.
  • Cant buy alcohol after 11 except clubs.
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7
Q

how is regulation used to overcome lack of education?

A
  • Compulsary up to 16, still have to stay in some sort of training until 18.
  • Its free.
  • Teachers need to be qualified
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8
Q

how is regulation used to overcome cocaine consumption.

A
  • Its illegal; both consumption and production.
    It has a negative externality.
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9
Q

what are the advantages of using regulation to tackle market failure?

A
  • Provents demerit goods being consumes.
  • Has an immediate effect as its easy to understand.
  • It is fairer than taxes becaseu taxes are regressive.
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10
Q

What are the limitations of regulation?
- costly and time consuming:

A

compliance costs go up - and therefore passed on to consumers.

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11
Q

What are the limitations of regulation?
- leads to unintended consequences:

A

regulation could create an an informal economy or make the problem worse. For example, ban of alcohol in the US led to a creation of an informal market for alcohol. And therfore goods sold in these markets dont count towards GDP.

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12
Q

What are the limitations of regulation?
- some laws are not enforceable:

A

they are costly and therfore cant be under extreme provision.
Fe example, open beer on the underground is illegal, but its hard to manage at it would costs a lot of money as it rquired hiring security.

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13
Q

What are the limitations of regulation?
- takes time to pass regualtion:

A

regualtion has to pass the MP’s and get their votes. Bills have to be introduced.
(they sit in the house of commons)
This is a long process.

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14
Q

What is a pension scheme?

A

Employers automatically put employees on a pension scheme and it is very hard to get rid of it.

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15
Q

What is state provision?

A

the government chooses to provide some merit goods for free.
eg: education and healthcare.

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16
Q

what are the advantages of state provision?
- lessens inequality:

A

tax of rich people goes to things poor people cant afford.

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17
Q

what are the advantages of state provision?
- increased consumption of merit good:

A

provided at higher levels compared to if left to free market.

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18
Q

what are the advantages of state provision?
- economies of scale:

A

providing everything is cheaper than subsidising certain companies.

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19
Q

What are the limitations of state provision?
- Very costly:

A

Billions of pounds are needed to provide, this incurs an opportunity cost. May require large amounts of borrowing in the long run

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20
Q

What are the limitations of state provision?
- Results in over-consumption:

A

When good is free, people who enjoy very little benefit will still consume good, leading ti significant over consumption and inefficiency. For example the NHS.

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21
Q

How do information campaigns help increase consumption of merit good?

A

Consumption increases because people now know that its good for you.

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22
Q

examples of where information provision is used to overcome market failure:

A
  • Cigarette consumption.
  • Gambling awareness.
  • Sustainable energy usage.
  • Exercise more.
  • Eat healthier, the colour system.
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23
Q

why might information campaigns be ineffective in solving market failure?

Can be used as evaluation!

A
  • To some people, short term benefits are greater than long term costs.
  • People have bounded rationality, only rational to an extent.
  • Addictions.
  • People act on impulse.
  • Influence.
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24
Q

what are price controls?

A

When the government may choose to directly interfere with the price mechanism by imposing “price controls”. This is used to solve market failure or when the market equilibrium contradicts the governments objectives.

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25
Q

minimum price:

A

A minimum price is set above the market equilibrium price and the price is not allowed to go below it.
This causes excess supply equal to QS-QD.

26
Q

illustrate a minimum price on a driagram:

A
27
Q

3 types of MInimum price:

A
  • On some merit goods (agriculture).
  • on demerit goods (alcohol).
  • minimum wage.
28
Q

demand and supply in minimum price:

A

Theoretically, there will be excess supply, but demand is likely to be inelastic, and therefore there will be no excess supply as alcohol takes time to produce.

29
Q

Besides excess supply, what are the other problems with minimum price?

A
  • Leads to higher prices, reducing purchasing power for low-income groups.
  • Distortes the price mechanism, as it signals to the producers that they should supple more, even though there is no demand.
  • Unlikely to work if good has inelastic demand.
30
Q

illustrate maximum price in a diagram:

A
31
Q

maximum price:

A

a maximum price is set below the market equilibrium price. Price is not allowed to rise above this level. This causes excess demand.

32
Q

what problems result from a maximum price?

A
  1. excess demand - no profit incentive leads to less production of good (could be made worse if good is a necessity).
  2. maximum price on rent means landlords will sell their property or convert houses into offices, this will worsen housing shortage in the UK.
33
Q

3 examples of where government wants to set a maximum price?

A

housing - rent.
energy prices.
maximum wage (bonuses).

34
Q

what are property rights?

A

Property rights confer legal control or ownership of a good.

35
Q

why are property rights important?

A

Because they give the owner intellectual property rights and prevents the idea form being copied

36
Q

3 types of property rights:

A

copyright - music.
trademark - logos/branding.
patent - invention/innovation.

37
Q

what do property rights protect against?

A
  • misuse of common resources.
  • might suffer from resource depletion and resource degradation.
  • eg: the Amazon - example of negative externalities in production.
38
Q

what is the advantage of allocating property rights?

A

the person or the entity that owns the property (river) is able to sue the business/person in the court of law (if they keep polluting river).

39
Q

limitations of assigning property rights:

A
  1. property may be too big to notice or keep eye.
  2. dispute among people if they don’t get land.
  3. exploit land and take money from people to pollute.
  4. political arguments between countries if land is not defined to a specific country like a the amazon.
  5. legal disputes take ages to settle.
40
Q

what are tradabe permits?

A

A specific solution designed to overcome the problem of pollution.
Firms are only allowed to pollute if they hold a pollution permit, allowing only a specific amount of pollution to emit.

41
Q

who decides on the total number of permits?

A

The governmnet.

42
Q

what determines the price of pollution permits?

A

The free market- demand and supply.

43
Q

what happens if a firm pollutes more than they are allowed to?

A

They get fined from the regulator.

44
Q

what industries are pollution permits mostly used for

A

energy intensive industries:
- petroleum and coal.
- chemicals.
- metal industries.
- aviation.

45
Q

what are the advantages of using tradable permits?

A

Achieve a specific level pollution.
Firms switch to renewable energy.

46
Q

explain “achieve a specific level of pollution” as an advantage of tradable permits:

A

The govt sets the number of permits that can be traded. If a firm needs more permits then what its been allocated, they will need to buy them from competitors. This will drive up the prices.

47
Q

Explain “firms switch to renewable energy” as an advantage of tradable permits:

A

If having permits becomes too expensive, firms switch to renewable energy because it may be cheaper in the long run.

48
Q

What are 4 limitations of tradable permits?

A
  • There might be too many permits on the market.
  • Lack of global action.
  • cost of enforcement.
  • pollution is not always taken seiously.
49
Q

explain “There might be too many permits on the market”.

A

If the government misjudges the number of permits and allocates too many, the price of permits will fall, reducing the incentive to invest in renewable energy.

50
Q

explain “Lack of global action”

A

For the system to work, there needs to be collaboration between the biggest polluters (China, USA). This is hard to achieve because china expects america to reduce its pollution levels because for its per capita pollution measurement, and america expects china to reduce pollution because its biggest polluter in the world.

51
Q

explain “Cost of enforcement”

A

Costly to enforce as government have to spend money, human resources and technology and produce a system that works. For developing countries, this is unlikely to be a priority.

52
Q

Explain “pollution is not always taken seriously”

A

In the UK, politicians might attach random targets to win votes or to prevent losing votes to the green party. This also means they might put more permit on the market than necessary.

53
Q

define government failure:

A

when government intervention in the economy causes and inefficient allocation of resources

54
Q

4 causes of market failure:

A
  1. distortion of price signals.
  2. information gaps.
  3. unintended consequences.
  4. administrative costs.
55
Q

Explain “distortion of price signals” as a cause of government failure:

A

minimum or maximum price - when govt introduces minimum price, this creates excess supply. This signals producers to produce more or new markets to enter, but there is no demand.

56
Q

Explain “information gaps” as a cause of government failure:

A

The government doesn’t have enough information about demand and supply.

57
Q

Explain “unintended consequences” as a cause of government failure:

A

This is where the government intervenes to improve market failure, but worsens the problem.

58
Q

Explain “administrative costs” as a cause of government failure:

A

cost of enforcement may be high.
eg: technology, HR, police/bodyguards.

59
Q

Examples of government failure:
- prohibition strengthened the mafia 1920

A

When the govt banned alcohol in the US, it caused the mafia to supply alcohol, leading to a rise in organised crime.

60
Q

Examples of government failure:
- White elephant projects

A

concorde supersonic airlines was a joint venture between british and french government. Politicians did not back out even when it was suggested to be uneconomical, they kept putting money in and spent 10x the budget.

61
Q

Examples of government failure:
Common agriculture policies

A

The CAP was intended to solve market failure in agriculture and protect farmers, but the EU didnt take into account of minimum prices would lead to over-supply. There was also unintended consequences of trade wars and environmental problems form farmers trying to supply as much as they could.

Microeconomics OMAR (24 decks)

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