Public Sector Intervention Flashcards
What are the 6 Reasons of market failures
Externalities
Missing Markets
Imperfect Competition
Lack of information
Immobility of factors of production
Imperfect distribution of income and wealth
Describe Externalities
Also known as spill-over effects or third-party effects
Costs and benefits that convert private costs and benefits into social costs and benefits
Costs and benefits which are not included in the market price
Negative and Positive
Why are markets incomplete
They cannot meet the demand for certain goods
What are merit goods
Goods that are highly desirable for general welfare but not highly rated by the market. They are undersupplied
E.g. Health Care, education
What are Demerit goods
Goods that are harmful to society but are highly rated by the market. They are oversupplied.
E.g. Alcohol, Cigarettes
What is imperfect competition
When competition is limited by certain producers preventing new businesses entering the market
Barriers to entry are created
Imperfect market does not allow for price negotiation
Businesses charge high price and supply low quantities
What is lack of information
Consumers, workers and entrepreneurs do not have the necessary information to make rational decisions
How does lack of information affect consumers, workers and entrepreneurs individually
Consumers - Need information in order to maximise benefits
Workers - Need to be aware of job opportunities
Entrepreneurs - Lack of information on costs, availability and productivity of FOP impacts effectiveness
Describe immobility of Factors of Production
Labour takes time to move geographically and occupationally to meet the changes in demand
Physical Capital cannot be relocated easily
Structural changes require changes in workers skills, employment and work patterns
Describe imperfect distribution of income and wealth
People who have access to capital and have more skills earn more than those who don’t
Discrimination has many negative effects on groups
Market produces goods and services only for those who can afford them
What are the 3 effects of market failure
Inefficiencies
Externalities
Monopolies and imperfect markets
What are the 2 types of inefficiencies
Productive / Technical Inefficiency
Allocative Inefficiency
What is productive inefficiency
When resources are not used appropriately to produce the maximum number of goods at the lowest cost and best quality. Some resources may be wasted
What is allocative inefficiency
When resources are not allocated in the correct proportions. Product mix does not match consumers tastes
What are the two types of externalities
Negative and Positive
What are negative externalities
Externalities that have a negative effect on the consumer such as cigarettes
What are the three methods governments use to reduce negative externalities
Carry out campaigns to persuade people from causing negative externalities
Levy taxes on goods that cause negative externalities
Pass laws and regulations to prevent activities that cause negative externalities
What are the 3 ways the government encourages positive externalities
Advertising on radio and television
Providing education, health care and other services at low prices or for free
Providing producer subsidies to lower the cost of a product and encourage its usage
What is an example of positive externality
Education
Describe firms in an imperfect market and what the government does to lessen the effects of these
Firms in an imperfect market supply a limited quantity of goods and services at a very high price
Government uses laws on competition to prevent exorbitant prices, ensure entry to the market is free, prevent harmful collusion and encourage foreign competition
What are the 6 reasons why the government intervenes in the economy
Private sector does not provide enough services
Provide public services such as hospitals and schools
Government wants to protect consumers against unfair practices by monopolies
Promote fair treatment of workers and prevent exploitation
Control strategic enterprises e.g. Electricity
Guard against market prices that may be damaging to the economy’s health
What are the 6 ways the government intervenes in the economy
Indirect taxes
Subsidies
Minimum Prices
Minimum Wages
Maximum Prices
Welfare
What are indirect taxes
A tax paid indirectly by consumers through the purchase of goods and services
What are the three types of indirect tax
VAT
Excise duties
Custom duties
What are the 3 reasons for indirect taxes
Reduce the demand for a harmful product
Raise revenue for the state
Limit the impact of imported products
Why does the government provide subsidies to producers
Government provides subsidies to producers in order to encourage them to increase the production of certain goods
What are the 4 types of subsidies
Producer
Consumer
Export
Employment
What are producer subsidies
Subsidies given to suppliers of agricultural products
What are consumer subsidies
Payments made by the government so consumers can buy goods they would not normally afford
What are export subsidies
How government assists firms in increasing their exports
What are employment subsidies
Paid to employers to reduce labour cost and encourage more employment
What are 3 reasons for producer subsidies
Promote employment and entrepreneurship
Encourage the establishment of new businesses
Improve the international competitiveness of domestic industries
What are 3 effects of producer subsidies
Increase in quantity supplied and demanded
Prices will decrease and more consumers will be able to enjoy the goods
Creates uncompetitive industries and these firms will not survive in the long-run, if there are no subsidies
What are 2 reasons for consumer subsidies
Reduces price of the product
Encourages the use of a particular product that the government feels is in the public interest
What are 5 effects of consumer subsidies
Price of a product increases
People who receive the subsidy pay less than the original price
Those who could afford the original price pay slightly more for the product
Overall quantity of the product that is being used increases
Government monitors the prices and supply set by the markets to avoid consumer exploitation
Why are minimum prices implemented
The state may feel that some prices are too low that they need to assist suppliers
This is done by setting a minimum price ABOVE the market price
What are the 2 reasons for implementing minimum prices
Enable the producer to make a comfortable profit
Encourage the production of essential goods
What are the 3 effects of a minimum price
Surplus of the product in the market
Surplus results in government buying extra of the product and dumping it locally or abroad
Price is higher than if it were left to the market mechanism
What is a minimum wage
The lowest price that an employer can pay an employee
What are the 6 effects of a minimum wage
Surplus of labour being offered
Wage rate increases
People are paid a more equitable and fair wage for their services
Fall in employment due to higher wage costs
Risk of inflation due to firms increasing selling price to adjust for the increased wages
Damages the competitiveness of some firms due to higher cost of production
What are the 3 reasons for implementing maximum prices
To keep the prices of basic food low in order to ensure the poor have access
Prevents consumers being exploited and having to pay excessive prices
Keeps prices low and controls inflation
What are the 3 effects of a maximum price
Price is lower than it would be if it were left to the market mechanism
Deficit / Shortage of the product
Leads to black markets
What is welfare
The state of well-being of a person
What are the 3 characteristics of welfare
Welfare grants are provided for people to meet their basic needs
Improving welfare reduces poverty and increases spending on basic food
Government provides merit goods and supplements the income of poor people
What are the 3 types of social welfare grants
Social Grants
Children’s social support
Special Awards
What are social grants
Grants that are paid to people in need E.g. Old age grants, disability grants
What are children’s social support grants
Care-Dependency grant, foster child grants and child support grant
What are Special award grants
Social relief of distress grant and transport relief
