Section 6: Government Intervention Flashcards
1
Q
What do indirect taxes do the supply curve
A
Causes it to shift to the left
1
Q
Explain the two types of indirect taxes
A
Specific taxes - fixed amount that’s charged per unit of a particular good no matter what the price of that good is
Ad valorem taxes - these are charged as a proportion of the price of a good
2
Q
What do governments do in relation to goods with negative externalities
A
They put indirect taxes on them
3
Q
What are the two aims when governments tax goods with negative externalities
A
The aim is to internalise the externality and make the producer or consumer cover the cost of its externalities
The taxes make revenue so the government can use it to offset the effects of the externalities
4
Q
Explain what a landfill tax is and how is the amount of the tax decided
A
Local authorities or firms with dispose of waste at a landfill site are charged an environmental tax
The tax is set to an amount to reflect the social costs of using landfills
5
Q
What are the positive of a landfill tax
A
This tax should encourage recycling which in turn will reduce the negative externalities
6
Q
What decides the amount of tax placed on a good that is passed onto the consumer
A
If demand for a good is price inelastic most or all of the extra cost will be passed on to the consumer
If demand for a good is price elastic then the producer is much more likely to take on most of the extra cost
7
Q
What are the 2 advantages to a tax imposed by the government onto a good
A
The cost of externalities is internalised and the increased price for the good may decrease demand and the level of its production
If demand isn’t reduced there’s still the revenue made so the government can offset any externalities
8
Q
What are the 4 disadvantages to a tax imposed by the government onto a good
A
Can be difficult to a put a monetary value on the ‘cost’ of the negative externalities
If the good’s demand is price inelastic it won’t affect demand
Firms might relocate and sell abroad to avoid the taxation
The revenue isn’t always spent on offseting negative externalities
9
Q
Why might a government pay a subsidy
A
To increase demand for merit goods with positive externalities
10
Q
What does a subsidy do to the supply curve
A
Supply curve shifts to the right
11
Q
What are the 3 advantages to subsidies
A
The benefit of goods with positive externalities is internalised
Subsidies can change preferences - making a merit good cheaper will increase demand for it and make it more accessible
Subsidies can support a domestic industry until it grows to the point that it can exploit economies of scale and become internationally competitive
12
Q
What are the 5 disadvantages to a subsidy
A
It can be difficult to put a monetary value on the benefit of the positive externalities
Any subsidy has an opportunity cost
They make producer inefficient and reliant on subsidies - the companies have less incentive to reduce costs or innovate
The effectiveness depends on the elasticity of demand
Subsidied goods and services may no be as good as those they’re aiming to replace
13
Q
What is the point of a government imposing a maximum price
A
To increase consumption of a merit good or to make a necessity more affordable
14
Q
What happens if the maximum price is set below the equilibrium price - what is done to mitigate the consequences of this
A
It will lead to excess demand and a shortage of supply
The excess demand cannot be cleared by market forces so to prevent shortages the product needs to be rationed out
15
Q
What is a big factor on the excess demand if the maximum price is set below the market equilibrium
A
A good’s price elasticity of supply and price elasticity of demand has an effect on the amount of excess demand
16
Q
What is the purpose of a minimum price
A
To make sure that suppliers get a fair price
17
Q
What will happen if the minimum price is set below the market equilibrium price
A
It will have no impact
18
Q
What will happen if the minimum price is set above the market equilibrium price
A
It will reduce demand and cause an excess in supply
19
Q
What is a big factor on the excess demand if the minimum price is set above the market equilibrium
A
The price elasticity of supply and demand will have a big effect o nthe amount of excess supply
20
Q
How does minimum prices restrict monopsony power
A
They provide a guranteed price for suppliers and ensure that a firm that’s a monopsony buyer can’t keep negotiating lower and lower prices
21
Q
What are the two advantages to maximum prices
A
Help to increase fairness by allowing more people to purchase certain goods and services
Can be used to prevent monopolies from exploiting consumers
22
Q
What are the 3 disadvantages of maximum prices
A
Since demand will be higher than supply, some people who want to buy the product aren’t able to
Governments may need to introduce a rationing scheme to allocate the good
Excess demand can lead to the creation of a black market for a good
23
Q
What are the 2 advantages of minimum prices
A
Producers have a guranteed minimum income which will encourage investment
Stockpiles can be used when supply is reduced
24
What are the 4 disadvantages of minimum prices
Consumers will be paying a higher price than the market equilibrium price
Resources used to produce the excess supply could be used elsewhere - inefficient allocation of resources
Government spending on a minimum price scheme could be used in other areas - schemes may have high opportunity cost
Destroying excess goods is a waste of resources
25
What is state provision
When the government provides certain goods or services
26
What are the 2 advantages to state provision
Can help to reduce inequalities in access
Can redistribute income - a lot of money that pays for state provision comes from taxing wealthier individuals
27
What are the 3 disadvantages of state provision
Less incentive to operate efficiently - no price mechanism
Lacks the motive for profit to determine what's supplied - doesn't respond to consumer demand
The opportunity cost
May reduce individuals self reliance in some areas
28
What are the 3 positives for the government funding the NHS
Consumption of health care can contribute to a happier and healthier population
Means that health care is available to all regardless of income
Can reduce sick days so it will increase productivity
29
What are 4 disadvantages to the state provision of health care
Provision that's free to the point of delivery can result in excess demand (e.g. long waiting lists)
Lack of price mechanism may make hospitals and clinics less mindful of resources
Limited budget and needing to cover the whole population - not always possible to respond to the wants and needs of individuals
Can reduce patients self-reliance
30
Why do publicly owned firms lack efficiency
Because they lack competition and that can lead to market failure
31
What is privatisation
The transfer of the ownership of the a firm or industry from the public sector to the private sector
32
Explain 4 ways that privatisation is executed
Sale of public firms - Royal mail was privatised by the sale of shares
Contracting out services - government pays a private firm to carry out work on its behalf
Competitive tendering - private firms bid to gain a contract to provide a service for the government - they compete on price and quality offered
Public Private Partnerships (PPPs) - private firm works with a government to build something or provide a service for the public
33
What is an example of a Public Private Partnerships
A Private Finance Initiatve - a private firm is contracted by the government to run a project
34
What are the 4 advantages to privatisation
Increased competition improves effficency and reduces x-inefficiency
Improves resource allocation - privatised firms have to react to market signals of supply and demand
PFIs mean lower taxes in the short run because the government won't pay for the new facility immediately
PFIs enable the building of important facilites that the government might not be able to afford to build
35
What are the 5 disadvantages of privatisation
A privatised public monopoly is likely to become a private monopoly
Privatised firms may have less focus on safety and quality because they have more focus on reducing costs and increasing profits
The new private firm might need regulating to prevent it from being a private monopoly - taxpayers pay for this
A PFI will often cost more in the long run than it's worth - so it adds to government debt and may not represent value for money
PFIs mean higher taxes for future generations to pay for the cost of the government leasing the facility
36
What are regulations
Rules that are enforced by an authority and they're usually backed up with legislation
37
Give 3 areas where regulation can help
Reducing the use of demerit goods and services
Reducing the power of monopolies
Providing some protection for consumers and producers from probelms arising from asymmetric information
38
What are 2 forms of legislation that have been created to limit the damage caused to the environment by economic activity
Clean Air Act
Environmental Protection Act
39
Why are some regulations difficult to set
Some regulations need to be worldwide
Monitoring compliance with regulations may be difficult
40
Explain 4 regulations that are set to encourage the use of renewable energy
The UK government introduced Renewable Obligation Certificates to encourage the use of power generated from renewable energy soureces
Electric suppliers were given a set minimum percentage of power that had to come from renewable sources
Companies who generated the renewable energy were issued with ROCs which linked to the amount of renewable energy they generated; they then sold these certificates on to suppliers
Suppliers that fell short of the target percentage of power from renewable sources had to pay a financial penalty - the money raised were given to suppliers that did reach the target
41
How does deregulation affect competition
It removes some barriers to entry so it can be used to increase competition in markets
42
In what type of markets is deregulation used to increase competition
Particularly in monopolistic markets
43
What are the 3 advantages to deregulation
Improves resource allocation - removing regulations means the market becomes more constestable and the threat of new competition means the price falls closer to marginal cost and output increases
Can be used alongisde the privatisation of a public monopoly to prevent the privatised firm from becoming a private monopoly
Improves efficiency by reducing the amount of 'red tape' and bureaucracy
44
What are the 3 disadvantages of deregulation
Difficult to regeulate some natural monopolies
Dergulation can't fix other market failures such as negative externalities, consumer inertia or immoblie factos of production
Dreegulation might mean there's less safety and protection for consumers
45
Give an example of a natural monopoly that might be too hard to regulate
Utilities
These require large infrastructures and there are expensive and to build and mantain and there's only a need for one of them
46
Why would a government introduce a competition policy
To protect the interests of consumers by promoting competition and encouraging the market to function more efficiently
47
Name two organizations that monitor competition and unfair monopolistic behaviour
The European Commission
UK's Competition and Markets Authority
48
How is competition and monopolistic behaviour monitored (They look for 4 things)
They look out for:
- Mergers - they monitor mergers and takeovers so tehy can prevent those that
aren't beneficial to the efficiency of the markekt or to consumers
- Agreements between firms - often agreements involving prise fixing, splitting
markets or limiting production are anti-competitive, cause market inefficiency
and are unfair to consumers
- The opening of markets to competition - this is when markets that were
controlled by a government are opened up to competitoin
- Financial support from governments - if a government in one EU country gives
financial support to firms in a market, this may give them an unfair advantafe
over firms in other EU countries in that same market
49
What type of markets are there going to regulatory bodies
Monopolistic
Oligopolistic
50
Why is it important there is the right information before introducing competition policy
If the information is reliable then the government should be able to intervene in the market in a way that will improve efficiency, allocate resources more effectively and improve fairness to the consumer
If the information is imperfect then this could lead to government failure
51
Give 3 ways a government use privatisation to introduce competition
A publicly owned monopoly can be privatised to open it up to competition and force it to respond to market signals
There needs to also be more steps to introduce competition because the public monopoly can just become a private monopoly after it's private
So other steps need to be taken aswell such as deregulation - increases competition and protects consumers
52
Give me 4 ways regulation be used to control or prevent monopoly power
Price caps are an example to limit monopoly power and to prevent monopolies from exploiting consumers
They can introduce regulations to ensure quality standars, such as in food production or construction
Can regulate profits by imposing windfall taxes on what it decides are excessive profits - this means the government will tax those profits at a higher rate. Windfall taxes can help to prevent firms from gaining too much monpoly power, but it reduces their incentive to improve efficiency
Setting performance targets with some sort of penalty can also maintain competition
53
Explain the 2 types of price caps
RPI - X : firms must make real price cuts. RPI is inflation and X is the efficency improvements the government or regulating body expects firms to be able to make
RPI - X - K : commonly used in the water industry - K is the amount of investment firms will need to make in order to achieve efficiency improvements
54
Give 2 examples of performances targets
Firms might be given certain standards of cutstomre service they need to achieve
NHS departments might be given targets for the number of patients they should treat
55
Explain the Payment Protection Insurance regulation
Insurance that's used to repay debt should the borrower be unable to do so
In the UK there was a little competition in the PPI market, a high level of rejected claims and a lot of cases of selling unnecessary cover
The market was investigated by the Competition Commission who produced a list of requirements for firms selling PPI, such as providing information about the right o cancel and costs. The aims were to prevent future mis-selling, help consumers make informed decisions, and increase competition in the market
These requirements have increased compeition and successful reclaims of mis-sold insurance have risen since the investigation
56
Explain the mobile phone roaming charges regulation
Roaming charges are charges for data usage, calls or texts when abroad - the European Commision has monitored these cahrges 2007 and found that a lack of competition led to excessively high charges
They used price caps to significantly reduce data roaming charges, and charges for calls and text messges
All telecommunications providers in member states must comply with these price caps
Firms can offer lower prices than the caps to compete with each other
57
Give 2 ways deregulation be used to increase competition
Can make a market more contestable so it's easier for new firms to enter the market
This increases competition, causing the price to fall closer to marginal cost, and output to increase
58
What is a method that governments use to control pollution
The government will set an optimal level of pollution and allocate permits that allow firms to emit a certain amount of pollution over a period of time
59
What is the EU emission trading systems
A tradable pollution permit scheme, with permits called emissions allowances
These allowances are distributed between the EU's member governments, who in turn allocate these allowances to firms
60
What happens if firms exceed the allocate pollution limit
They are fined
61
What can firms do with Tradable Pollution Permits and allowance
They can sell permits and allowances to other firms
62
What happens to the pollution allowance each year
It is reduced
63
What can firms in the ETS do to offset their own emmisons
Able to invest in emmision-saving schemes outside of the EU to offset their own emissions
64
What are 4 advantages of Tradable Pollution Permits
Good way of reducing pollution
Firms causing low pollution benefits
Governments can use any revenue
Can internalise the externality of pollution
65
What are 4 disadvantages of Tradable Pollution Permits
Optimal pollution level can be difficult to set - if too high firms have no incentive to lower their emissions and if level is too low new firms might now be able to start up
Firms may choose to relocate
Creates a new market - might be market failure in this market
High levels of pollution may still exist in specific areas
Administrative costs in this schemes to firms and governments
66
What are 3 examples of government-provided information
School and hospital performance league tables
Advertising campaigns encouraging healthy eating
Compulsory food labelling for most foods
Health warnings on cigarette packets
67
Why is government-provided information provided for merit goods
To increase demand
68
What are 6 positive impacts of governments nationalising industries
Governments can ensure the industry better provides the goods and services the country needs when it is nationalised
Government can set the output and priceds of an industry at a level that most benefits society
These industries can be more easily regulated so that they act in the most interest of consumers
Governments can pay public secto workers a fiar wage
Nationalised industry will have greater economies of scale than an industry populated by several private firms
Nationalised industry can pay suppliers fair prices
69
Give 2 reasons why nationalised industries tend to be inefficent
Because they're not driven to reduce costs and make profit
Little incentive for firm to act prudently because the taxpayers will bail them out if they get into trouble
70
What are 4 things that governments do for/to small businesses to increase competition
Promote small business
Likely to involve providing tax breaks or subsidies for small firms
Reducing regulations and 'red tape' - encourages new small businesses to start up
Increaing competition in this way should lead to greater choice and lower prices for consumers
71
How can government intervention go wrong
Can lead to misallocatoin of resources and a net welfare loss - this government failure
72
Give 3 examples of government intervention may cause market distortion
Income taxes acts as disincective to hard-work - if you increase your earningy by working hard then you'll have to pay more income tax
Governmental price fixing can lead to distorions of price signals
Subsidies may encourage firms to be inefficent by removing the incentive to be efficient
73
What is bureaurcracy
Enforcement of tehse rules and regulations by government officials
74
Give 2 ways government bureaucracy interfere with the forces of supply and demand
Can prevent markets from working efficiently
For examples planning controls can create long delays in construction projects
75
How can excessive bureaucracy lead to an inefficient economy
Can lead to a lack of investment
76
What is excessive bureaucracy assumed to be
Government failure
77
Give 2 kinds of policies that are a source of government failure
Conflicting policies are seen as a source of government failure
One policy may negatively impact another policy
78
Why can't politicians be completely efficient at all times
They are constrained to what is politically acceptable
79
What type of solutions do governments often favour
Short term solutions because the government are under alot of pressure to solve issues quickly
80
Give 3 reasons why inadequate information causes government failure
Imperfect information can mean it's difficult to assess the extent of a market failure and that makes it hard to put a value on the government intervcention that's needed to correct the failure
Governments may not know how consumers want the resources to be allocated
Governments don't always know how consumers will react to intervention
81
Give 2 reasons why administrative costs can be a cause of government failure
Measures to correct market failure such as policies and regulations and can use a large amount of resources - this results in high costs
Some government intervention can involve policing which can also be expensive
82
What is regulatory capture and what does it cause
Frims covered by regulatory bodies can sometimes influence the decisions of the regulator to ensure that the outcomes favour the companies and not the consumer
This causes government failure
83
Give 7 causes of market failure
Regulatory capture
Takes time for a government to solve an issue
Policies can be affected by issues outside of its control
Administrative costs
Conflicting policy objectives
Imperfect information
Political incentives
84
What is it called when a policy is affecte by issues outside of the governments control
External shocks
85
Give an example of a policy set out to help farmers and explain
The Common Agricultural Policy
The main aim is to correct market failure caused by fluctuating prices - provides a reasonable and stable income for farmers
86
How does CAP work
Direct payments to farmers
Introduce tariffs on goods from outside the EU
Subsidies
Buffer stocks
87
Explain 5 problems that CAP caused
Encouraged increase output because farmers were guaranteed a minimum price - led to envronmental damage from a greater use of intensive farming methods and chemical fertilisers
Minimum price led to oversupply which had to be bought and stored by government agencies at great expense - the government sold this stock outside the EU; farmers outside the EU couldn't compete with the low prices
Large amount fo wasted food products - perishable goods were destroyed
Increased food prices were unfair on poorer households - can be argued that welfare gains to farmers brought about were smaller than the welfare loss to consumers
Cost to taxpayers of getting rid of excess produce
88
How might governments intervene in the housing market
Setting max rents
89
How are the problems of maximum rents an example of government failure
Excess demand - shortage of available properties - can cause black market to develop
Black market prices may be more so they won't benefit from the maximum rent
Shortage of rental properties can impact supply of workers - workers may not be able to find rental properties near work - could affect ability of firms to attract new staff in areas where shortages are bad
90
Why would the government subsidise public transport
To reduce car usage and pollution levels
91
Why might governments subsidies for public transport might not increase passenger numbers
Viewed as an inferior good - demand may not increase if prices decreases
92
How can subsidising public transport services lead to net welfare loss
Allocation of resources that don't lead to the increasing of usage can be seen as a misallocation of resources and will lead to a net welfare loss
93
What are road congestion schemes
Method of reducing the external costs linked to road congestion and the pollution that it creates
Charges users to travel on roads in areas where congestion is a problem
94
What are the impacts of getting the amount of road pricing wrong
Too low - have limited impact on traffic levels
Too high - too few cars will use areas - result in reduced trade for busineses within the area and there will be an under-utilisation of the orad space in the congestion charge are and may also cause congestion in other areas
95
What is the point of fishing quotas
To make sure fish stocks remain stable in European waters
96
What are the problems with the fishing quotas imposed by the EU
Stocks of some species are still taking place - could mean limit is too high and overfishing is still taking place
Some boats throw dead fish back in the sea if the exceed their quota
Poor monitoring of fish catches
97
How did the EU address the problem with fishing quotas
Landing obligation
Everything that is catched must be kept on board to be counted and they aren't allowed to discard any fish
