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ECON2245 Business Economics > Week 11 Gov Intervention (Topic 9 & 10) > Flashcards

Week 11 Gov Intervention (Topic 9 & 10) Flashcards

1
Q

What causes market failures?

A
  1. Externalities
  2. Public goods
  3. Market power
  4. Immobility of factors
  5. Protection of public interest
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2
Q

Describe external cost of production

A

External costs of production
MSC > MPC (where MSB = MPB)

MSC = MPC + MEC

Upward sloping MEC

Overconsumption of a good leading to MCS being larger than MPC

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3
Q

Describe external benefit of production

A

external benefit of production
MSC < MPC (MSB=MPB)

Downward sloping MEB

Under consumption

increase until MSC = MPC - MEB

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4
Q

Describe external cost of consumption

A

external cost of consumption
MSB < MB (MSC = MPC)

Upwards Sloping MEC

Over consumption

Decrease consumption until
=> MSC = MSB - MEB

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5
Q

Describe external benefits of consumption

A

external benefits of consumption
MSB > MB (MSC =MPC)

Downward slopping MEC

Under consumption at a price too low

Increase price + quantity until
=> MSB = MPB + MEC

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6
Q

What are public goods?
Describe their characteristics

A

Goods produced or subsidised by the government
= > free market will not produce them

Non-rivalry
- One person’s consumption does not prevent another person’s consumption

Non-excludable
- Everyone can use the good

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7
Q

Why and how does the government intervene in monopoly markets?

A

Monopoly profit maximisation produces a dead weight loss (under prodcution)

Solution
=> Subsidise firm to increase production until MC = AR = MSB = MSC

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8
Q

What are the 8 types of government intervention?

A
  1. Taxes/subsidies
  2. Minimum wages
  3. Tariffs
  4. Blocking mergers
  5. Deregulation
  6. Fiscal policy
  7. Policy to increase productivity
    8 Environmental policy
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9
Q

What are the arguments against gov intervention

A
  1. Causes shortages or Surplus
    Price Floor = surplus
    price ceiling = Shortage
  2. Insufficient information
    => full costs + benefits unknown
  3. Bureaucracy and Costs
    - Increased administration costs
  4. Lack of market incentive
    - allows inefficient firms to survive
  5. Shifts of policy
    - Makes future planning hard
  6. Lack of freedom
    - Reduces free choice of economy
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10
Q

How can government intervention be reduced?

A
  1. Privatisation
  2. Deregulation
  3. Contracting out
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11
Q

What are the pro privatisation arguments?

A
  1. Market forces
    - Increased competition
    - Efficient spending
  2. Less government Intervention
    - Less political influence
  3. Financing tax cuts
    - reduced debt + increases tax revenue
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12
Q

What are the arguments against privatisation?

A
  1. Natural monopolies
  2. Public interest
    - MSB & MSC generally ignored
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13
Q

What is contracting out and what does it do?

A

Contracting out
- government offering contracts for jobs

increases ex-ante competition

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14
Q

What are incentive payments?

A

Two part payment plans to ensure contact achieves desired outcome

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15
Q

What are the issues of contacting ?

A

Ensuring the contacts are completed properly

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16
Q

What are the advantages and disadvantages on tax/subsidies as a government intervention?

A

Pros
- Market sets equilibrium
- Can increase welfare
- Holds firms accountable

Cons
- Governments need perfect information
- Taxes impact firms differently

17
Q

How do taxes affect markets with elastic demand?

A
  • Large drop in quantity
  • small drop in price
  • Producers take majority of tax burden
18
Q

How do taxes affect markets with inelastic demand?

A
  • small drop in quantity
  • large increase in price
  • Consumers take majority of tax burden
19
Q

How do taxes on elastic goods affect producers?

A
  1. Earn less per unit
  2. Drives innovation as firms compete for the reduced quantity
20
Q

What are the two types of controls for externalities?

A
  1. command and control
    - Impose quantitive limits on externalities
  2. Tax/subsidise
    - Tax negatives and subsidise positives
21
Q

What are the advantages of a tariff?

A
  • gov revenue
  • Protects infant industries
  • Encourages new market entrants
  • Allows self sufficiency
  • Protects domestic goods
  • Preserves traditional industries
22
Q

What are the disadvantages of tariffs?

A
  • Creates DWL
  • Allows inefficient markets to survive
  • Retaliation from other countries
23
Q

What is a natural monopoly?

Where is P set?

A

Market where one firm can produces at a lower average total cost and supply the whole market

P = normal profit maximisation MC=MR

24
Q

What is a nationalised monopoly?

Where is P set?

What are the disadvantages?

A

A nationalised monopoly is a government-owned monopoly

p = MC

Cons
- run at loss
- x - efficiency (subsidies by another tax)

25
Q

What is a state regulated monopoly?

Where is P set?

Pros and Cons?

A

Monopoly where price is controlled by govenment

P is set at D = LRAC

Pros
- No subsidy needed as earns normal profit

Cons
- Not allocatively efficient
- Less consumer surplus
- No incentive to innovate to reduce LRAC

26
Q

What is price Cap regulation?

Pros and cons?

A

Government sets maximum price of the monopoly

pros
- incentivises innotvate to reduce LRAC by allowing economic profit

Cons
- Hard to pick correct P
=> too low means forced losses
=> too high means excessive profits

ECON2245 Business Economics (9 decks)

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