1.4 Government Intervention
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- Created by: chalky-nerd
- Created on: 14-03-21 02:44
What are the 7 different ways that the government intervene to solve market failure?
Indirect taxes
Subsidies
Max/min prices
State provision of public goods
Provision of information
Tradable pollution permits
Regulation
Subsidies
Max/min prices
State provision of public goods
Provision of information
Tradable pollution permits
Regulation
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What can indirect taxes solve?
Negative externalities
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What are the advantages of indirect taxes?
Social welfare is maximised
Government revenue increases
Government revenue increases
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What are the disadvantages of indirect taxes?
It will not have an effect on goods with inelastic PED
Taxes are politically unpopular
Taxes are politically unpopular
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What can subsidies solve?
Positive externalities
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What are the advantages of subsidies?
Social welfare is maximised
Can encourage small businesses
Can encourage small businesses
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What are the disadvantages of subsidies?
Expensive for the government, and a high opportunity cost
Firms can become over reliant
Firms can become over reliant
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Where are maximum prices set?
Below the market equilibrium
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Where at minimum prices set?
Above the market equilibrium
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What goods are maximum prices imposed on?
Goods with positive externalities
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What goods are minimum prices imposed on?
Goods with negative externalities
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What are the advantages of imposing max/min prices?
Brings about a level of equality, a more people will be able to afford the good (max)
Increase social welfare
Increase social welfare
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What are the disadvantages of imposing max/min prices?
Will not have an effect on goods with inelastic PED (mininum)
Difficult for government to know where to set the prices
Difficult for government to know where to set the prices
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What are tradable pollution permits?
Purchasable permits which allow the owner to have emission up to a certain amount
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How are tradable pollution permits supposed to reduce pollution?
In order to reduce costs in the future, companies would invest in greener technology
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What are the advantages of pollution permits?
Raise government revenue
Guaranteed that pollution will decrease as the number of permits is limited
Guaranteed that pollution will decrease as the number of permits is limited
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What are the disadvantages of pollution permits?
Expensive to police and monitor
Firms may absorb the cost of the permit and pass it on to their consumers
Firms may absorb the cost of the permit and pass it on to their consumers
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How can state provision of public goods correct market failure?
The state is providing goods which otherwise would be provided. This prevents the under provision of public goods
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What are the advantages of the state providing public goods?
Brings about a level of equality, everyone has access to the public goods
Improved social welfare
Improved social welfare
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What are the disadvantages of the state providing public goods?
Expensive, therefore a high opportunity cost
The government may produce the wrong combination of goods as the market mechanism is not involved
The government may produce the wrong combination of goods as the market mechanism is not involved
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How can the provision of information correct market failure?
It can help consumers make informed decisions
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What are the advantages of the provision of information?
Helps consumers act rationally
Best used alongside other policies as economists may be able to predict consumer actions more easily
Best used alongside other policies as economists may be able to predict consumer actions more easily
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What are the disadvantages of the provision of information?
Expensive and therefore high opportunity cost
The government may not have all the information
The government may not have all the information
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How can regulation correct market failure?
The government are able to impose laws and caps on goods to make sure social welfare is maximised
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What are the advantages of regulation?
Social welfare is maximised
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What are the disadvantages of regulation?
Laws can be expensive to monitor, incurring a high opportunity cost
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What is government failure?
When government intervention lead to market failure and net welfare loss
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What are the 4 different ways government failure can occur?
Distortion of price signals
Unintended consequences
Excessive administration costs
Information
Unintended consequences
Excessive administration costs
Information
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What is the distortion of price signals?
When the government change price signals and distort the market mechanism
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How can the distortion of price signals lead to government failure?
The market is acting on misinformation and therefore can lead to inefficient allocation of resources
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How can unintended consequences cause government failure?
When consumers or producers act in unexpected ways and cause unintended consequences
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How can excessive administration costs cause government failure?
The cost of administering the policy may not be worth the increased social welfare
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How can information gaps cause government failure?
Some policies might be decided based on limited information
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Other cards in this set
Card 2
Front
What can indirect taxes solve?
Back
Negative externalities
Card 3
Front
What are the advantages of indirect taxes?
Back
Card 4
Front
What are the disadvantages of indirect taxes?
Back
Card 5
Front
What can subsidies solve?
Back
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