Theme 1 - Government intervention

Question 1

What are 4 reasons why governments may intervene to correct market failure?

Answer 1

• Reduce negative externalities
• Increases positive externalities
• Increase supply of merit/reduce demerit
• Supply public goods that are under supplied by the market

Question 2

Why is reducing inequality in the distribution of income so important?

Answer 2

Uneven can lead to distribution so we need to ensure there is little poverty. If poverty continues, this can create further negative externalities

Question 3

Why is supporting UK industry so important?

Answer 3

Our economy needs to maintain full employment so we need to maintain the industries so employment remains high. Some larger companies have more labour than others so it is also important to ensure these are all supported
- Infrastructure is also important to provide quality services

Question 4

What are 6 major ways a government can intervene to reduce market failure?

Answer 4

• Indirect taxations
• Subsidies
• Maximum and minimum pricing
• Trade pollution permits
• State provision of public goods
• Regulation

Question 5

What is the difference between a specific tax and an ad valorem tax?

Answer 5

Specific tax = a set amount of tax on a product.
Ad valorem tax = a tax that increases as the prices increases. (a % of the price of the good/service).

Question 6

How does the ad valorem tax and the specific tax diagramdiffer?

Answer 6

A specific tax diagram has a parallel shift whereas the ad valorem tax has a curve that tilts.

Question 7

What does a subsidy do to a firm?

Answer 7

It decreases cost of production shifting the supply curve right so, the firm can produce more for cheaper, benefitting them with higher profits positive externalities

Question 8

What is a minimum price?

Answer 8

The lowest price that a good/service can be sold for?

Question 9

What is some of the main reasons why a minimum price is used?

Answer 9

• prevention of negative externalities
• Decreasing the supply of the good

Question 10

Why can minimum pricing be a negative?

Answer 10

• Distorts the price mechanism
• Wastage of resources due to excess supply as at higher prices, supplies want to supply more
• Time lag

Question 11

What are 3 evaluation points of minimum pricing?

Answer 11

1. Elasticity of supply/demand
2. Depends on government subsidies
3. Depends on market structure.

Question 12

What is a maximum price?

Answer 12

When a government sets a price below equilibrium

Question 13

What is the common effect of a maximum price?

Answer 13

A maximum price can cause suppliers to decrease supply but demand will increase. This causes demand to extend and supply to contract.

Question 14

What are the main benefit to a maximum price?

Answer 14

Firms are unable to exploit consumers, better provision of merit goods and less likely occurrence of monopolistic markets

Question 15

What can a maximum price create in the future?

Answer 15

Consumers unable to gain the goods the are demanding because there is going to be an excess supply of the good so they will not benefit in the long run.

Question 16

What is a black market?

Answer 16

This where market start selling goods illegally which means firms can avoid using a maximum price

Question 17

What are pollution permits and what market failure are they trying to correct?

Answer 17

They are permits that states how much firms are legally allowed to pollute. They are done to reduce carbon emissions

Question 18

The difference between a pollution permit and pollution tax?

Answer 18

A pollution tax is a tax imposed on amount of carbon polluted by a firm. It is a tax that is imposed on the socially optimum level so that the externality is internalised.
A pollution permit is measured and then handed out to firms. Firms can buy more at auctions or trade with other firms.

Question 19

Describe the pollution permit diagram…

Answer 19

The diagram is a perfectly inelastic supply curve because there is a fixed number of permits. Then supply begins to fall when they start getting handed out and auctioned. The scarcity causes prices of them to increase.

Question 20

What can happen to firms that do not receive pollution permits?

Answer 20

Smaller business will be able to pollute more because they do not have to follow a permit. They can then expand and pollute the same as larger businesses. This means in the long run pollution permits will become useless and become more expensive for the government.

Question 21

What is the provision of public goods?

Answer 21

The government will supply goods for the public because people won’t supply goods that benefit people other than themselves.

Question 22

What is information provision?

Answer 22

Telecommunications and advertisement. When the government ensures consumers/producers have enough information to make a rational decision

Question 23

What is regulation?

Answer 23

This is when governments try to correct market failure?

Question 24

Ways in which regulation is enforced?

Answer 24

Non-market: price mechanism and market forces
Market: tariffs, trade restrictions, taxes, subsidies

Question 25

What is government failure?

Answer 25

It is when the government tries to intervene to correct market failure but they fail.

Question 26

What is the law of unintended consequence?

Answer 26

The government intervening to correct market failure leads to external consequences

Question 27

What are 3 examples of unintended consequences?

Answer 27

• raising taxes may decrease employment
• loss of incomes
• Increasing negative externalities

Question 28

What are administration costs?

Answer 28

This is the cost of hiring people to monitor firms to ensure that they are correctly following legal fees and rules