Theme 1 - Government Intervention Flashcards
Why do governments intervene?
To correct market failure
Ways in which the government corrects market failure?
Indirect tax
subsidies
max and min prices
tradeable pollution permits
provision of public goods
provision of information
regulation
Where does max price have to be?
Set below the free market price
Where does min price have to be?
Set above the free market price
Key example of minimum price
national minimum wage
Advantages of tradeable pollution permit
Benefit environment
government raise revenue
raises revenue for greener firms.
Disadvantages of tradeable pollution permit
Firms may relocate. Pass higher costs onto the consumer. Competition could be restricted if permits create a barrier to entry. Expensive to monitor.
How does state provision of public goods correct market failure?
Government provides the public goods that have positive externalities.
How does provision of information correct market failure?
Government’s ensure that there is no information failure so consumer and firm can make informed economic decisions.
How does regulation correct market failure?
The government could use laws to ban consumers from consuming a good that has negative externalities.
Net welfare loss
An overall loss of economic welfare when compared to the starting position
4 causes of government failure
Distortion of price signals
Unintended consequences
Excessive administrative costs
Information gaps
Distortion of price signals
The actions of government which distort the operation of the price mechanism and so misallocates resources.
unintended consequences
the unexpected and unplanned results of a decision or action
Excessive administrative costs
The social benefits of a policy might not be worth the financial cost of administering the policy.
