Th1.3: Government Intervention

Question 1

What are the 5 ways the government can intervene to ensure the market considers the external costs and benefits?

Answer 1

indirect taxes and subsidies
tradable pollution permits
provision of the good
provision of information
regulation

Question 2

Indirect taxes and subsidies

Answer 2

taxes can be put on goods with negative externalities and subsidies on goods with positive externalities. these help internalise externalities, moving production close to the social optimum position

Question 3

Tradable pollution permits

Answer 3

these allows firms to produce up to a certain amount of pollution, and can be traded amongst firms so give them choice whilst reducing the total level of pollution

Question 4

Provision of the good

Answer 4

when social benefits are very high, the government may decide to provide the good through taxation. they do this with healthcare and education

Question 5

Provision of information

Answer 5

since some externalities are associated with information gaps, the government can provide information to help people make more informed decisions and acknowledge external costs

Question 6

Regulation

Answer 6

this could limit consumption of goods with negative externalities, for example banning advertising of smoking e.t.c