MIRCO Government Intervention and Faliure Flashcards
Government Intervention
Regulatory action taken by the government in order to affect or interfere with decisions made by individuals, groups or organisations regarding social and economic matters.
Government Failure
Occurs when the government intervenes in a market which reduces the economic welfare, leading to an allocation of resources worse than the free market outcome.
Regulations (Government Intervention)
- definition
- examples
- Regulations are a form of government intervention in markets.
- Max CO2 emissions for cars
- Fishing quotas
- Minimum age laws
- Equal Pay Act = no wage discrimination
- Competition Act = prevents price-fixing cartels
Arguments for Government Intervention
- Move closer to social optimum (negative and positive externalities)
- Protect consumer interest i.e. increase CS: Increase allocative efficiency = -deadweight welfare loss (i.e. monopoly and collusive oligopoly)
- Increase efficiency (D, P, X, A) incentive
- Provide pure public goods
- Prevent information failure = +comp
Arguments Against Government Intervention
- Opportunity cost e.g. public finances
- Free markets are good (efficiencies) e.g. natural monopoly
- Government failure
Government Failure
- i.e.
- Disincentive effects
- Information failures
- Regulatory capture
- Political self-interest, influenced by political lobbying from major corporations
- Conflicting policy objectives
- Red tape costs to firms
- High enforcement costs
- Unintended consequences (side effects)
- Policy mytopia (short term solutions)
Regulatory Capture
Companies and their regulators form mutually beneficial relationship meaning the regulators operate in favour of producers rather than consumers
Policy Myopia
The idea that politicians have a tendency to look for short term solutions
VAT is an example of a … tax
What?
Causes?
Ad Valorem
Percentage of unit cost
Supply curve becomes more inelastic
