Microeconomics - Government Intervention Flashcards
why would an underconsumption of merit goods cause government intervention?
gov’s may want people to consume more things eg education which has positive externalities and encouraged using subsidies or free state provision
how will meeting basic needs cause government intervention?
consumers ability to consume goods and services depends on their income and wealth and a low income means they may not be able to afford basic goods to satisfy their needs and the market is under-providing these goods which can be a source of market failure
how can an overconsumption of demerit goods cause government intervention?
demerit goods eg vapes may be overconsumed and taxes and bans may solve the issue
how is improving information a policy objective for governments to intervene?
govs aim to improve the wellbeing of their citizens by encouraging them to make rational choices through reducing asymmetric information by giving consumers as much information as possible about their choices eg league tables for schools
how is focusing on SME’s a policy objective for government intervention?
small to medium size businesses benefit from deregulation and helps the government to achieve their goals
What are the powers of the competition and markets authority?
can force the break up firms which have become too powerful in a market and can force a firm to split or sell assets to increase competition
why may governments prevent monopolies?
monopolies through mergers can be inefficient as they restrict quantity and agree to raise price to a price level that isnt allocatively efficient so governments use blocking mergers and mergers are investigated which have one firm with >25% market share
how does regulation reduce monopoly power?
price ceiling restricts the amount firms can raise their prices which reduces the potential losses in efficiency or excessive profits are taxed
why do governments encourage competition through technological advances?
firm investment in tech leads to positive spill over effects as the technology is shared through an economy and each technological breakthrough pushes society further forward and leads to improved welfare
why do governments encourage competition through higher quality?
consumers will choose goods of higher quality as they bring more utility and improved welfare
Why does competition policy need high quality information?
governments can take action and push anti-competitive behaviour to improve efficiency if they recieve trustworthy info but it needs to be high quality and there is an opportunity cost to collecting information
what is price capping?
Where firms can only raise prices by a capped amount (typically taking inflation into account) to reduce the benefit to firms and consumers can access the goods and services at what the gov deems fair price
what is regulation and deregulation?
regulation - setting rules for firms by the gov to correct market failure
deregulation - loosening of rules
what are some costs of deregulation?
customers not protected from anti-competitive behaviour of firms and some market failures cannot be fixed eg problem with externalities and some natural monopolies need regulation
what are some benefits of deregulation?
allocation of resources improves as the gov reduce interference with the free market so efficiency improves
what are some benefits of regulation?
can correct market failures which arise from externalities and controls monopolies and stops them from taking advantage of customers and reducing welfare and punishes firms for anti-competitive behaviour
what are some costs of regulation?
hard to know which industries to regulate and how to regulate them and can be expensive to monitor firms to enforce regulation and there is an opportunity cost
what is regulatory capture?
firms may influence the regulating body so they favour the firm in any decisions and the regulator prioritises the interest of the firms rather than the consumer which causes government failure
what are revolving doors?
when investment bankers go on to work in government or in regulators
What is state provision?
Goods and services provided directly by the government payed through tax revenues eg NHS and police
what are some advantages of state provision?
state provision can reduce inequality by redistributing money from wealthy to poor and services may not exist without provision as they arent profitable
what are some disadvantages of state provision?
less incentive to make services efficient without a drive for profit and there is an opportunity cost of providing one service for another and there is a risk of government failure with asymmetric info
what is privatisation?
Public Private Partnerships - when private firm completes project for the government that benefits the public
what are some advantages of privatisation?
incentive for profit means resources will be allocated more efficiently and the gov gain revenue that can be put to alternative use when the government sell of their enterprise
what are some disadvantages of privatisation?
drive for efficiency means element of humanity is lost and the safety and spending on safety measures may be worse in privatised industry that are judged only on profits
what are specific taxes?
paid per unit and increase the cost of production by the tax amount on each unit which decreases price eg fuel duty as there is a 59p tax per litre on the consumption of petrol
what are Ad Valorem Taxes?
based on the value of the good being sold and increase the price by a fixed percentage eg VAT has 20% tax
What is the burden of a tax?
imposed taxes cause producers to pass some of the cost to the consumer by a higher price and absorb the rest. inelastic demand eg cigarettes causes more of a tax to be passed on to consumers as the demand wont decrease much
what are some disadvantages of taxes?
can lead to increase in inequality eg taxes on alcohol are regressive as they take up a disproportionate amount of income
market failure remains if taxes are too low yet taxes too high reduces competitiveness of firms and over-correct market failure
what are some advantages of taxes?
can help fund government expenditure which includes correcting adverse effects of the goods they are taxing
taxing demerit goods can lead to consumers choosing less damaging substitutes
What are indirect taxes?
taxes on household spending and consumption and applied to goods and services
How can smoking be a form of market failure?
people unaware of the negative impact of cigarettes in their health and the negative externalities of smoking arent considered by consumers
Why would governments place an indirect tax on cigarettes?
raises cost of production which shifts the supply curve towards socially optimal level
What are subsidies?
a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.
how can subsidies correct market failure?
encourages consumption and production of a good with positive externalities
what are some advantages of subsidies?
can reduce cost of product and allow firms to exploit EOS which improves long run efficiency and abroad competiveness
what are some disadvantages of subsidies?
may encourage laziness from producers as they dont need to be efficient and goods may be of a lower standard
what does a subsidy do to a positive consumption externality?
consumption subsidy will try to cut the price paid by consumers to p0 t increase consumption
what does a subsidy do to a positive production externality?
subsidy will shift the supply curve rightwards to the MSC curve
what is the impact of indirect taxes on governments?
generate revenues for governments which can be spent on capital investment or transfer payments.
inelastic demand will increase tax revenues and the burden of tax falls onto consumers which may not be good intervention for the government if the market was made up of mainly poor consumers
what is the impact of indirect tax on consumers and producers?
perfectly inelastic demand causes the QD to stay the same but price would rise and the burden of tax falls on the consumers yet perfectly elastic demand causes the burden to fall on the producer
what is an example of a subsidy?
employment of apprentices can be subsidised by a government
what is the impact of subsidies on consumer and producer surplus?
consumer surplus rises as price consumers pay has fallen and output has risen
producer surplus rises because price consumers pay + subsidy is higher than the price as the previous equilibrium
what is the impact of a subsidy on the government?
producer and consumer surplus rises yet the gov pay the size of the per unit subsidy x total output and governments must pay for subsidies using tax revenues for government borrowing
what are some costs of tradeable pollution permits?
cost to implement the scheme
hard to decide on the level of pollution
market for permits subject to failure
what are some benefits of tradeable pollution permits?
system can cap the level of pollution
lower pollution of a firm the more they benefit which encourages firms to lower pollution levels and governments make revenue
what are some advantages of subsidies and indirect taxation on the environment?
offering financial incentive for firms to reduce production levels is effective
funds from tax can be used in a related area
what are some disadvantages of subsidies and indirect taxes on the environment?
firms could relocate and resume existing levels of production elsewhere
taxes internalise the externality but many externalities are difficult to quantify
subsidies expensive to operate and abused by firms
what does the success of subsidies and indirect taxes depend on?
firms wont relocate if there is a coordinated approach between countries
extent that firms can pass costs onto consumers depends on the elasticity of demand for the product
what are some advantages of regulation and legislation on the environment?
provide strong incentive for firms to abide by them
offer clear instructions which leaves firms with no option but to follow
what are some disadvantages of legislation and regulation on the environment?
firms likely to seek loopholes in legislation and can be time consuming to enforce
what does the success of legislation and regulation depend on?
depends on how well the legislation is worded and the resources used to enforce them and the severity of punishments for breaching legislations
what are some advantages of tradeable pollution permits?
allow price mechanism to be used so could be allocative efficiency
inefficient firms in energy use during production will face highest costs
what are some disadvantages of tradeable pollution permits?
can be abused by large powerful names who may hoard permits and sell to the highest bidder to increase profit
permits can be expensive and time consuming to implement and enforce and can have little effect on reducing the emissions of very profitable firms
what does the success of tradeable pollution permits depend on?
if emission ceilings are set too high the price of permits will be too low
what is a maximum price?
policy to increase consumption levels of a good and new maximum price above equilibrium doesnt change anything yet below equilibrium creates more demand but shortage of supply and leads to excessive demand so more people can afford the good yet less people can have it as the supply is restricted which may lead to the good being sold in a black market
what is a minimum price?
used to correct failures which happens under monopsony power and new min price under equilibrium doesnt change anything yet above equilibrium creates less demand but increased supply and excessive supply
what are the pro and cons of a maximum price?
pros- protects consumers from exploitation and makes sure firms are more efficient by forcing them to pay more attention to costs
Cons - max price can deter firms from entering the market and limits investment into the industry as the amount of profit firms make is limited
what are pros and cons of a minimum price
pro- suppliers get reasonable price
Cons - consumers paying more for their goods and resources wasted when excessive goods destroyed and allocated inefficiently as they could have been used elsewhere instead of producing excess supply
what is a buffer stock scheme?
policy used to stabilise the price of important commodity which usually have inelastic demand and supply
what is the impact of the buffer stock scheme?
requires a lot of time and expense from the government running it eg 2 poor harvests in a row may mean the gov is running out stock
what is cost benefit analysis?
a study that compares the costs and benefits to society of providing a public good
how does administrative costs cause government failure?
resources needed to implement gov intervention buy may not be worthwhile if costs are too high
how does market distortions cause government failure?
can affect the price mechanism due to gov intervention eg income taxes give people less incentive to work hard which reduces efficiency
