Government Intervention - Unit 3 (AQA)

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  • Created on: 22-01-13 19:21
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Economics ­ Government Intervention in the market
Government Intervention in the Market
Market Failure = When resources are inefficiently allocated, because of imperfections in
the price mechanism which leads to a loss of economic & social welfare
Cases of market failure:
Negative Externalities
Positive Externalities
Public Goods
Merit Goods
Demerit Goods
Imperfect Competition
Immobility of FOP
Equity issues, including poverty & inequality
Market failure leads to productive & allocative inefficiency...
Productive Inefficiency = Firms are not producing output at minimum possible cost;
resources are being wasted which could have been used to satisfy wants & needs
Allocative Inefficiency = When resources are not used to produce goods and services that
consumers demand; the value that society places on the last unit of output does not reflect
the marginal cost of production
Government Intervention to improve the workings of markets:
Legislation & Regulation
Direct state provision of goods & services (including nationalisation)
Fiscal Policy intervention (including indirect taxation and subsidies)
Improving the quality and availability of information
Government intervention can sometimes fail; the main types and causes of government
failure include:
Political self-interest
Imperfect Information
Unintended Consequences
Regulatory Capture

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Environmental Market Failure
The environment plays an important role in shaping our economic & social welfare:
Provides services to consumers ­ living & recreational spaces
Provides natural resources necessary to sustain production & consumption
Provides a dumping ground for the waste products of our society
One of the most important environmental market failures stems from negative externalities
arising from production and/or consumption
Negative externalities occur when there is a divergence between private costs & social
costs (e.g.…read more

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Distributional Effects:
In the case of global warming, the poor citizens in developing counties are more likely to be
affected by flooding/drought.
They are less likely to have contributed to global warming though consuming goods and
services that contribute pollution.
They are less likely to be able to afford to protect themselves or take out insurance.…read more

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Income Distribution ­ Imposing taxes on some demerit goods such as cigarettes may
have a regressive effect ­ they take a larger share of the incomes of low income
consumers = increases inequalities in the distribution of income
May not achieve target quantity of pollution reduction ­ Hard to predict what tax
would be needed in order to make the reduction required ­ hard to predict how
producers & consumers will respond
More efficient alternatives ­ May be more cost effective for governments to use…read more

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Extending Property Rights:
Externalities often occur because property rights are not fully allocated; a key problem with
the environment is that commonly used resources such as the air around us are not
privately owned and so no organisation takes responsibility if they are over-exploited
(tragedy of the commons)
Governments can create a market in property rights ­ essentially `internalising' the
externality in this was by setting up tradable pollution permits for example
Pollution Permits:
Gives business the right to emit a given volume of waste…read more

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Cost Benefit Analysis:
CBA is used as a means of decision-making; when major projects have important or
controversial side effects it is used.…read more



This is a useful 6 page resume of how the government intervenes in the market to correct market failure. Seems quite comprehensive and notes can be used for a variety of prurposes.

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