solutions to market failure

Question 1

state provision definition

Answer 1

the government provides a fixed amount of a good (perfectly inelastic supply)

Question 2

indirect taxation definition

Answer 2

a tax on expenditure which can be avoided by not buying the good/service the indirect tax is imposed on

Question 3

how does indirect taxation impact markets

Answer 3

acts as an increase in the costs of production for a firm so shifts supply inwards raising price and contacting demand. reduces overconsumption.

Question 4

impact of indirect taxation on ped inelastic goods

Answer 4

reduces consumption by a less than proportional amount than the increase in price as most of the tax burden can fall on the consumer

Question 5

impact of indirect taxation on ped elastic goods

Answer 5

reduces consumption by a larger than proportional amount to the increase in price as most of the tax burden falls on the supplier.

Question 6

how to evaluate the impact of indirect taxation

Answer 6

consider…
unintended consequences
tax revenue
will there be a loss in jobs/competition
is the tax regressive
does it address the root cause of the market failure
SIZE OF TAX

Question 7

subsidy definition

Answer 7

a payment from the government to act as a fall in the costs of production to a firm

Question 8

what kind of goods are subsidies used for

Answer 8

to correct market failures as a result of positive externalities or merit goods

Question 9

how does subsidy impact markets

Answer 9

acts as a fall in the costs of production to a firm so shifts supply out reducing price and expanding demand increasing consumption

Question 10

how to evaluate the effectiveness of subsidies

Answer 10

consider…
does it address the root cause of the market failure
is part of the subisidy self financing due to corporation tax
does it benefit the taxpayer
unintended consequences
may it protect inefficient firms from failure

Question 11

minimum price definition

Answer 11

a legal price floor below which the good cannot be sold

Question 12

when is minimum price used

Answer 12

when free market clearing price is too low so either consumers need protecting from overconsumption or producers need protecting from unreliable income. or to create surplus stock for storage.

Question 13

unintended consequences of minimum prices

Answer 13

surplus supply
inefficient resource allocation
higher prices for consumers impacting low income households
shadow economy

Question 14

maximum price definition

Answer 14

a price ceiling above which a good or service cannot be sold

Question 15

when is a maximum price imposed

Answer 15

when the free market clearing price is too high/ the good is essential/to prevent monopoly exploitation

Question 16

what problems are caused by maximum prices

Answer 16

supply shortages, encouragement of shadow economies ,queues, market is less profitable so firms become encouraged to leave it

Question 17

conclusion of maximum prices

Answer 17

economic theory predicts that maximum price will only ever benefit some consumers and disadvantage those who would pay a higher price for the good but now cannot obtain it due to shortages

Question 18

when is a buffer stock scheme used

Answer 18

to correct the market failure of volatile pricing to guarantee reliable income for producers and reliable prices for households. typically used for agricultural goods

Question 19

how does a buffer stock scheme work when the price of a commodity falls too low

Answer 19

in a good year, when high supply drops price below the price floor, the government will buy up stock to shift supply inwards, and raise prices to the price floor. this stock is then stored.

Question 20

how does a buffer stock scheme work if price of a commodity rises too high

Answer 20

in a poor year if low supply raises prices above the price ceiling, the government will release stock to shift supply out reducing price to the price ceiling

Question 21

arguments FOR a buffer stock scheme

Answer 21

lower risk of extreme food poverty, stable incomes and profits for farmers, stabilises uk economy and in turn encourages investment. if done correctly will be self financing

Question 22

arguments against a buffer stock scheme

Answer 22

stock may not be enough to raise/decrease prices enough. causes surpluses and manipulates the market possibly causing inefficient resource allocation whilst in storage. storage may be expensive/stock may lose value. government could be corrupt

Question 23

what is a tradeable pollution permit

Answer 23

permission for firms to have a legal right to pollute a certain amount

Question 24

why are tradeable pollution permits used

Answer 24

to tackle the negative externalities in production of pollution

Question 25

how do tradeable pollution permits work

Answer 25

firms buy permits allowing them to pollute, if they emit less pollution they can sell the permits to other firms, creating a market for them negotiated by supply and demand pricing. incentivises firms to keep pollution down to keep costs down. generates revenue for the government.

Question 26

problems with tradeable pollution permits

Answer 26

difficult to know how many to make, hard to measure pollution levels and which firms emitted them, admin costs, can be bought from poor countries for cheap. eu emissions trading act did not work.

Question 27

what are the 2 types of legislation and regulation

Answer 27

that which targets the producer and that which targets the consumer

Question 28

examples of legislation and regulation

Answer 28

controlling the consumption of demerit goods (age restrictions), making goods illegal (drugs), controlling sale and supply (prescriptions), transparency with consumers about ingredients/side effects

Question 29

arguments against legislation and regulation

Answer 29

it costs money to enforce. regulations may be too lax or too tight, will not work without a significant consequence such as a fine. without this it will not raise revenue only cost money. hard to measure the effects.

Question 30

when is information provision used

Answer 30

merit or demerit goods which have market failures due to lack of understanding

Question 31

how does information provision work to correct market failures

Answer 31

by education the consumer , their incomplete valuation of costs/benefits gets shifted to the correct value, so the SOA can be achieved

Question 32

examples of information provision

Answer 32

advertising campaigns about smoking and unhealthy foods such as change4life

Question 33

arguments against information provision

Answer 33

if the people do not trust the government then their campaigns will be ignored, it may not provide enough information to bridge the gap, they are expensive and have a large opportunity cost

Question 34

public private partnership definition

Answer 34

collaboration between a government and a private firm

Question 35

positives of public private partnerships

Answer 35

allow for large scale government projects to be completed using private funding, private innovation and government objectives. firms have skill in the industry so can be more efficient that the government, economies of scale (bulk buying)

Question 36

negatives of public private partnerships

Answer 36

costs overrun, technical defects, no profit motive as government will cover costs can lead to inefficiency. government is not a specialist in the industry.

Question 37

government failure definition

Answer 37

government intervenes to try and correct a market failure but the end result is a greater deadweight loss than if they had left it alone.

Question 38

four ways government failure could occur

Answer 38

distortion of price signals, minimum and maximum price, taxing, unintended consequences

Question 39

government failure due to distortion of price signals

Answer 39

manipulation the supply or demand of a product may protect inefficient firms from failure and stop new, more efficient firms from joining the market

Question 40

government failure through taxes

Answer 40

taxes can raise prices artificially and burden the wrong groups or be regressive, reducing standard of living

Question 41

government failure due to min or max price

Answer 41

can cause shortage or over supply wasting valuable FOPs and over-rationing the good so people who want the good cannot get it.

Question 42

government failure due to unintended consequences

Answer 42

if the government suffers from information failure they may make the wrong decision or use the wrong amount of intervention, shadow economies emerging after intervention