Theme 1 - Government intervention (key terms)

Question 1

Government information

Answer 1

Campaigns and sources of information used in order to correct a market failure and/or influence consumer behaviour e.g. ‘Don’t drink and drive’

Question 1

Minimum price

Answer 1

A legally imposed price floor below which the normal market price can’t fall - has to be set above normal equilibrium price to be effective

Question 2

Maximum price

Answer 2

A legally imposed price ceiling (maximum price) that suppliers can’t exceed - in an attempt to prevent the market price rising above a certain level
Has to be set below free market price

Question 3

Tradable pollution permits

Answer 3

These give companies a legal right to pollute a certain amount per fixed time span and can then sell their surplus pollution permits

Question 3

Regulation

Answer 3

Government rules and regulations that can control the behaviour of producers or consumers in a market

Question 4

Government failure

Answer 4

• Policies that cause a deeper market failure
• Ranges from trivial (where gov intervention is merely ineffective), to cases where intervention produces new and more serious problems that did not exist before

Question 5

Net welfare loss

Answer 5

An overall loss of economic welfare when compared to the starting position

Question 6

Regulatory capture

Answer 6

A form of government failure - happens when a government agency operates in favour of producers rather than consumers

Question 7

Polluter pays principle

Answer 7

The government may choose to intervene in a market to ensure that the firms and consumers and who create negative externalities include them when making their decisions e.g. first parties are forced to internalise external costs & benefits through indirect taxes