Government Intervention

HideShow resource information
  • Created by: Clodagh
  • Created on: 27-04-14 08:55
View mindmap
  • Government Intervention
    • Why?
      • Governments may intervene in the operation of the market mechanism if there is a market failure or inequality in the distribution of income/wealth
      • The government intervenes in order to try to improve economic welfare
    • State Provision of a Good or Service
      • If there is complete market failure (a missing market), a government may decide to provide that good or service
      • For merit goods or in markets with significant positive externalities, government may choose state provision as the best means to guarantee the right level of production
    • Indirect Taxation
      • Indirect taxes are taxes on a good or service (VAT)
      • This method is usually used for demerit goods or goods with externalities
      • Indirect taxes are popular with governments because they can improve economic welfare and also bring in extra revenue
      • VAT is the main indirect tax in the UK
        • Specific taxes are used for many demerit goods. This moves the supply curve parallel to the original line: there is no increase in gradient unlike VAT
    • Subsidies
      • A subsidy involves government giving producers a sum of money for each unit produced
        • This lowers the costs of supply
      • Subsidies are iseal for merit goods or goods that provide positive externalities in their consumption or production
      • If demand is price inelastic, subsidies are very effective at reducing price
        • If demand is price elastic, subsidies are very effective at increasing consumption
    • Price Controls
      • This method usually takes the form of a guaranteed minimum price
        • Government will pay this price if the market price is too low, to encourage suppliers to produce vital products
      • These are often used in agriculture
    • Buffer Stocks
      • Where minimum prices are used, government might accumulate stocks of agricultural products
        • If the product can be preserved, government can use these buffer stocks to increase supply when a poor harvest occurs
          • This can prevent shortages and high prices when supply is scarce
      • In times of shortage, government uses up buffer stock; in times of good harvests government builds up buffer stock
    • Pollution Permits
      • Pollution is a common negative externality
        • To limit negative externalities, governments often license an industry, by giving permits to pollute to individual firms such that the total level of pollution is acceptable
          • Some firms may find it easier/cheaper to limit their pollution below their target and sell their permits to other firms
      • They can be effective in reducing overall costs of pollution control, but tend to be less effective at reducing the overall level of production, unless permits are severely restricted
    • Regulation
      • This is where government intervenes through legislation, such as pollution limits, or other direct controls
        • Government may ban products such as drugs
      • Where government's aim is merely to change the level of consumption or production
        • With goods such as alcohol, regulations can be ineffective
    • Government Failure
      • Government intervention attempts to improve the allocation of resources. Government failure occurs where intervention leads to a misallocation of resources or a reduction in economic welfare
      • Inadequate Information
        • In the past government encouraged high consumption of dairy products as medical information suggested it was healthy
          • This advice has been amended as new information has been acquired
      • Conflicting Objectives
        • The market mechanism is considered by some people to be the best means of maximising output
          • However, it is also recognised as a contributor to inequality
            • Government therefore faces conflict in achieving higher output and greater equality
      • Administrative Costs
        • Where government intervenes, administration of the process is needed
          • If government intervention provides welfare benefits, but to a lesser extent than the administrative costs, then the intervention has not been worthwhile


No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Government intervention in markets resources »