Uses, advantages and disadvantages of government intervention in markets

To help with 24 marks questions on the aqa unit 1 economics paper

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  • Created on: 16-02-11 09:36
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INTERVENTION USES ADVANTAGES DISADVANTAGES
Taxation Negative Internalises the externality, works through the market Unit tax has to =MEC but difficult to know MEC. Who to tax
externalities: mechanism, raising prices, contraction of demand, is not always clear, Indirect taxes are regressive penalising
Demerit goods: signalling rationing & incentive functions still operate. those on low income greater. Little effect on the quantity if
cigarettes Closer to social optimum allocation MSB= MSC. Low PED. Distorts the free market price and the 3 functions
Revenue raising. of price.
Subsidies Positive Internalises the externality, works through the market Unit subsidy has to =MEB but difficult to know MEB. Who to
externalities mechanism, lowering prices, extension of demand, subsidise is not always clear. Little effect on the quantity if
Merit goods signalling rationing & incentive functions still operate. Low PED. Distorts the free market price and the 3 functions
education Opportunity cost, government tax revenue can not be of price.
used elsewhere.
Maximum Prices Housing Rent Extension of demand. Improves affordability for low Creates excess demand which can not be cleared and
controls income groups. More equitable distribution of good. persists indefinitely- waiting lists/queues or other forms of
Simple to implement through legislation. rationing are needed. Distorts the free market price and the
3 functions of price. Little effect is set too high.
Minimum Prices Alcohol 50p per Contraction of demand, reducing consumption. Simple Minimums prices are regressive penalising those on low
unit Minimum to implement through legislation. income greater. Little effect of quantity if Low PED.
wage Avoidance and black markets. Distorts the free market
price and the 3 functions of price. Little effect if set too low.
Buffer stock Agricultural Reduces price volatility. Profit making, suppliers can Higher prices. Perishable items cannot be stored. Start up
scheme markets plan with greater certainty as price more stable. capital needed. Admin. & storage costs. Difficult to know
Commodity Secures farm (suppliers) income. Consumers have target price so it tends to collapse- either run out of
markets greater certainty in household budgeting. money or excess stocks built up and then released &
prices plummet.
State provision Public goods: Goods can be provided which would not be provided The market does not operate, there are no market
defence, street by free markets, (because of the free rider problem equilibrium prices, the signalling rationing and incentive
lighting which occurs when good is non excludable.) Increases functions of prices do not operate. State planning and
allocative and social efficiency as provision of goods beaurocracy replaces private enterprise. Taxes needed to
is achieved. fund provision. Admin. Cost high.

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Bans and High negative Reduces consumption. Simple to implement Avoidance and black markets, Ban eliminates and
Regulations externalities: through legislation, Bans totally eliminate any potential benefits, (Utility), (medicinal uses for
Recreational Externality. cannabis) Enforcement costs, doesn't achieve social
drugs. optimum of MSB=MSC unless MEC is V high and/ or
MEB V low. Regulatory capture
Tradable Carbon trading Creates incentives through the market mechanism Difficult to know how permits to issue and the total
Permits for Co2 emissions to reduce externality. Limit set on the externality.…read more

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Positive An advantageous third party spill over In consumption: disease Subsidies, (medical prescriptions, afforestation scheme, green energy: subsidised wind farms) state
effect for which there is no eradication from vaccinations provision, (state vaccination programmes, MMR jabs for children) Regulation (compulsory
Externalities appropriate compensation through In production: afforestation education) Increasing demand/ supply and achieving MSB=MSC when MSB > MPB
the market, resulting in a situation R&D
where MSB >MPB.…read more

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Patricia

Really helpful (Y)

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