MICRO - 7. government intervention ✅ Flashcards
what are the forms of government intervention
- indirect taxation
- subsidies
- regulation/law
- price controls/manipulation
- information provision
- state provision
- pollution permits
- establishing property rights
total welfare increased if any costs incurred in intervention are less than benefits gained
how can market failure be approached
market self correcting itself
government intervenes which can lead to government failure
results in equitable and efficient market
pro free market economy views vs interventionist
- unregulated markets work well should be left to market forces vs intervention makes markets work better
- market mechanism achieves more optimal outcome vs markets are uncompetitive and prone to market failure
how can indirect taxation be manipulated
- higher production costs can be transferred to consumer, manipulates demand by affecting price
- increased production costs —> internalises externalities (polluter pays) —> saves overconsumption/production —> promotes allocative efficiency whilst generating gov revenue
why might indirect tax not always work
- price inelastic demand not suitable as responsiveness needed
- needs to be set at right level or political opposition may occur and unknown impacts could be incurred
- regressive as tax takes greater proportion of low income than of high income
- black markets could arise if price becomes too high
- increased costs causing inflation
what is the purpose of subsidies - how does it go about solving market failure
provided to producers to:
- reduce costs
- increase supply
- reduce price
- increase demand
what do subsidies do to correct market failure
correct market failure by:
- increasing merit goods output
- reducing inequalities
- improving factor mobility
- increasing market competition
- tackling information failure
how do subsidies solve market failure
lower production costs —> lowered price and increased quantity —> solves underconsumption/production —> allocative efficiency and welfare gain
how do subsidies influence costs
- subsidies = very costly
- opportunity cost exists if this is best use of public money could it be more productively spent as subsidy goes to every producer in industry
what problems are there with choosing the correct subsidy level
- subsidy set at right value, cant assume gov know PE value and over/under subsidy likely and market failure unsolved
- under subsidise = ideal quantity not reached and MPC in middle
- over subsidise = cost element becomes bigger and government failure occurs as a result of asymmetric information (info problem)
how can giving a subsidy to a firm create problems
- firms abuse power of subsidy and lose incentives as they rely on it so government failure as costs involved = significant benefits lost
- long run dependency for firms can allow costs to destabilise
- difficult to remove
how does elasticity influence the success of a subsidy
- for a subsidy to be successful = price elastic demand
- greater quantity in market to solve failure
- question effectiveness of subsidy with price inelastic demand
examples of subsidies to producers
- job retention scheme
- government grants for businesses with youth unemployed/long term job losses
- state aid for loss making businesses
- low cost affordable housing subsidies to construction companies
- export subsidies for producers
examples of subsidies to consumers
- people buying electric vehicles
- food and energy subsidies
- boiler scrappage schemes
- free tv licenses
- tampons and sanitary products
- subsidies for childcare tax free
what are benefits of subsidies on consumers
- helping with food and childcare = improved nutrition = labour productivity increased and long term burden on healthcare decreased
- encourages output and investment in fledging sectors eg life sciences, renewable energy
- protects jobs in loss making industries by recession and economic shocks
- improves housing and transport affordability to improve geographical mobility of labour
- reduce training cost and employing workers
- achieve more equitable distribution of income
what are other downsides of subsidies to consumers
- distorts market prices - misallocation of resources
- tax payers may pay and receive no benefit
- can conflict with other government objectives (gov impact)
what is government failure
intervention in market = net loss of economic welfare rather than gain
total social cost > total social benefits
what can cause government failure
- distortion of price signals
- unintended consequences
- excessive admin costs
- info gaps
- conflicting objectives
- politicians maximising own utility
what is included with distortion of price signals
- farming tariffs on imports to support domestic agriculture
- implementing/increasing min wage
- high unemployment benefits
what are unintended consequences
- good intentions having other consequences
- in gov intervention in markets usually at least one unintended consequences as economics is a social science and accurate prediction of reactions don’t exist