topic 8 - theme 1 Flashcards
government intervention and government failure
what is government failure?
where government intervention in a market is ineffective, wasteful or damaging or when government intervention leads to a misallocation of resources
what are externalities?
positive or negative third party effects arising from production or consumption of a good or service
why do externalities need correcting?
because they create over/under consumption/production of a good/service
how do you correct an externality?
- taxation -> should be aimed towards engineering a socially optimal level of output
why does a market for public goods need correcting?
if left to the free market, there will be a missing market and complete market failure due to no firm wishing to have the incentive to provide the good or service as a result of the free-rider problem
how might a government correct market failure?
state provision
what is state provision?
the government provides the good or service or sub-contracts the provision to a private firm but pays the firm using tax revenue collected from households and firms
what is imperfect market information?
where either the firm or consumer has insufficient info to the extent that it may distort rational economic behaviour
what is indirect tax?
a tax levied on expenditure on goods or services
what happens if the tax is excessive or not large enough?
the government intervention could over/under correct the imperfection in the market
what is a recent example of government failure?
common fisharys policy
what is a pollution permit?
giving firms a legal right to pollute a certain amount
- where a firm is taxed on production of a good or service that generates negative externalities
what are the advantages of pollution permits? - dealing with externalities
- prevents pollution
- lessens carbon footprints on the country
- money for government to improve renewable sources
what are the disadvantages of pollution permits? - dealing with externalities
- might not meet demand
- firms cheating emission tests
- firms leave or move country to become other country’s problem
what is internalising the externality?
an attempt to deal with an externality by bringing an external cost or benefit into the price system
- make a consumer or firm pay for any harm they cause to others
what is the NIMBY (not in my backyard) syndrome?
people are happy to support the construction of an unsightly or unsocial facility, providing it is not in their own area
what are property rights?
a legal system that allocates ownership of a resource or idea
what can tax revenue be used for?
- subsidising goods that provide positive externalities
- state provision of public goods
- transfer payments to redistribute income and tackle income inequality
what does maximum price mean?
the legal limit on price of a good or service
- below equilibrium price
- causes excess demand
what are examples of maximum price?
- rent controls in New York
- train tickets
- rent
- food
what are disadvantages of maximum price?
- shortage of goods -> distorts the market - > disequilibrium -> some households are unable to get the good/service
- informal sector -> people below will sell at max price
- long term -> less investment, decrease in supply
what does minimum price mean?
lowest level that a good/service can be sold for
- causes excess supply
why was minimum price designed?
so consumption decreases -> decrease in welfare gain/decrease in negative externalities
what are some examples of minimum price?
- demerit goods -> e.g. cigarettes - age limit, tax, adverts to correct market failure
- information gap - long term impact on health e.g. vapes -> gov failure
- non-renewable - minimum price would restrict demand to conserve the resource
what is prohibition?
an attempt to prevent the consumption of a demerit good by declaring it illegal
what is one main argument against certain types of government intervention?
opportunity cost
