Theme 1 - Micro - 1.4 Flashcards
Government information
Campaigns and sources of information used in order to correct a market failure and/or influence consumer behaviour.
An example would be the ‘Don’t drink and drive’ campaigns.
Maximum price
A legally imposed maximum price in a market that suppliers cannot exceed - in an attempt to prevent the market price from rising above a certain level. To be effective a maximum price has to be set below the free market price.
Minimum price
A legally imposed price floor below which the normal market price cannot fall. To be effective the minimum price has to be set above the normal equilibrium price.
Polluter pays principle
The government may choose to intervene in a market to ensure that the firms and consumers who create negative externalities include them when making their decisions e.g. first parties are forced to internalise external costs & benefits through indirect taxes.
Pollution permits
Permits allocated in an emissions trading system, for example each permit in the EU trading scheme allows a business to pollute 1 tonne of CO2.
Price ceiling
A price ceiling is a regulated maximum price in a market – sellers cannot legally offer the product for sale at a price higher than the ceiling. To be effective, a ceiling must be set below the normal free market equilibrium price.
Price floor
A price floor is a minimum price for example a minimum wage in the labour market. Sellers cannot legally under-cut the price floor.
Regulated prices
Not all prices are set by the free-market forces of supply and demand. In Britain, a number of prices are affected by regulators who may impose a pricing formula on suppliers. Good examples are rail fares, the cost of postage stamps and water bills.
Regulation
Government rules and laws that can control the behaviour of producers or consumers in a market.
State provision
Government-provided good or services - funded through tax revenue to provide goods which have positive externalities or are public goods.
Government failure
Policies that cause a deeper market failure. Government failure may range from the trivial, when intervention is merely ineffective, to cases where intervention produces new and more serious problems that did not exist before.
Net welfare loss
An overall loss of economic welfare when compared to the starting position.
Regulatory capital
A form of government failure, happens when a government agency operates in favour of producers rather than consumers.
Unintended consequences
A cause of government failure whereby the government’s actions result in unexpected effects. For example, in the 1960s the government cut spending on railway infrastructure and built roads instead. This caused a significant rise in car transport, which in turn has led to a rise in the demand for trains because the roads are so congested.
