Microeconomics 2.11 Government Intervention

Question 1

Direct taxation

Answer 1

Amount levied on a business or an individual that must be paid to the government

Question 2

Indirect taxation

Answer 2

Amount levied on a producer to increase the cost of a product.

Question 3

Indirect and inelastic PED

Answer 3

There would be high prices with the burden on the consumer and smaller reduction in the quantity demanded

Question 4

Indirect taxation and elastic PED

Answer 4

There would be a small price rise with most of the burden with the producer and a greater change in the quantity demanded.

Question 5

Subsidy

Answer 5

Amount paid to a producer to a business to produce goods or services.

Question 6

Subsidy and elastic PED

Answer 6

Small change in price and greater proportionate change in quantity demanded

Question 7

Government expenditure

Answer 7

Also known as public spending. Governments collect taxes and then spend on different government departments in different ways.

Question 8

Areas of government expenditure

Answer 8

Social security, health, defence, education, public debt, public order and safety, housing and the environment, transport, industry, agriculture and employment.

Question 9

Government faces opportunity cost

Answer 9

Between decisions to spend tax payers money on different public spending projects.

Question 10

Price ceiling

Answer 10

Maximum price

Question 11

Price floor

Answer 11

Minimum price

Question 12

Example of a minimum price

Answer 12

Price for alcohol in Scotland

Question 13

Example of maximum price

Answer 13

Rent controls

Question 14

Buffer stock system

Answer 14

System of holding and releasing stock to maintain a market price despite supply fluctutations.

Question 15

Criticism of buffer stock systems

Answer 15

Cost of storage; not all goods can be stored; government information failure on setting the market price.

Question 16

Public Private Partnerships

Answer 16

Joint initiative between government and producers in order to increase supply to a market.

Question 17

Private Finance Intitiative

Answer 17

a funding arrangement under which the private sector designs, builds, finances and operates an asset (e.g. a school) for the public sector in return for an annual payment linked to its performance in delivering the service.

Question 18

Contracting out

Answer 18

When the public sector places activities in the hands of a private firm and pays for the provision.

Question 19

Competitive tendering

Answer 19

A process where the public sector calls for private firms to bid for a contract.

Question 20

Pollution permit system

Answer 20

System for controlling pollution based on a market for permits that allows firms to pollute up to a limit.

Question 21

Example of a pollution permit system

Answer 21

EU Emissions Trading System

Question 22

Advantage of pollution permits

Answer 22

Sets a limit and gives firms the incentive to reduce emissions.

Question 23

Disadvantages of pollution permits

Answer 23

Cost of policing the system and government failure on number of permits to issue.

Question 24

Property Rights

Answer 24

By issuing property rights, this can lead to those in the market trading to reach a socially optimal output. By the economist Ronald Coase

Question 25

Coase theorem

Answer 25

Externalities could be internalised in the market where property rights can be enforced and there are limited transaction costs and smaller number of parties.

Question 26

Information Provision

Answer 26

The government provide information to correct information failure e.g. information on second hand cars or on demerit goods.

Question 27

Regulation and legislation

Answer 27

Where the government declares goods illegal or sets clear rules around the market of certain goods.

Question 28

Competition Policy

Answer 28

Competition and Markets Authority- regulation to protect consumers and reduce market power of some firms.

Question 29

Government failure

Answer 29

a misallocation of resources arising from government intervention that causes a less efficient allocation of resources and imposes a welfare loss on society.

Question 30

Regulatory capture

Answer 30

The firms operating in the market know more than the government and so can manipulate the government to increase the market failure.

Question 31

Moral hazard

Answer 31

Firms in the market know the government will protect them so engage in riskier behaviour e.g. banks investment

Question 32

Lack of profit incentive

Answer 32

Government intervention can remove the profit incentive and so firms don’t work as efficiently

Question 33

Misallocation of resources

Answer 33

Governments allocate too many or too few resources to supplying a good or correcting a market failure.

Question 34

Information failure

Answer 34

The government does not have access to perfect information and so allcoate resources inefficiently

Question 35

Cost of intervention

Answer 35

Adminstrative and other costs use tax payers money and can be more expensive than the private market.