1.4.1 Government Intervention in Markets

• Provision of Information


  Campaigns and sources of information used to correct a market failure and/or influence consumer behaviour eg. don't drink and drive
• Pollution Permits


  Permits allocated in an emissions trading system eg. each permit in the EU trading scheme allows a business to pollute 1 tonne of CO2
• Regulated Prices


  Prices that aren't set by the price mechanism instead a pricing formula is imposed on firms
• Regulation


  Government rules and laws that can control the behaviour of firms or consumers in a market
• State Provision


  Government-provided good or services - funded through tax revenue to provide goods which have positive externalities or are public goods
• Price Minimum 


  A scheme imposed by the Government which prevents prices from falling below a certain level. The price minimum is higher than the equilibrium price so firms supply more but consumers demand less leading to excess supply

  
• Price Maximum


  The price set in a market by the government to prevent a good from being sold at a high price thus firms supply less but consumers demand more leading to excess demand

  
• Income Inequality

  The unequal distribution of income between households can be solved using legislation or a progressive tax system
• Underconsumption of Merit Goods


  -Tax demerit goods

  -Provision of information

  -Reduce tax on merit goods

  -Introduce a maximum price

  -Subsidise
• Overproduction of Demerit Goods


  -Introduce a maximum price

  -Carbon offsetting

  -Increase tax

  -Subsidise merit goods

  -Legislation eg. bans

  -Tradable Pollution Permits
• Price Volatility


  Fluctuations in the price of a commodity is solved using a maximum or minimum price
• Types of Government Intervention


  -Indirect Tax

  -Subsidies

  -Min/max prices

  -Tradable pollution permits

  -Regulation

  -Provision of information

  -State provision of public goods
• Benefits of Indirect Tax

  -Increased tax revenue

  -Fewer negative externalities

  -Cheap

  -Maximises social welfare
• Limitations of Indirect Tax


  -Less spending

  -People still buy habit-forming goods

  -Creates a black market

  -Regressive

  -Government may not know how much to tax
• Benefits of Subsidies


  -Welfare is maximised due to consumption of merit goods

  -Increased affordability of socially important goods
• Limitations of Subsidies

  -High spending = opportunity cost

  -Difficult to remove

  -Producers become inefficient

  -Inelastic PED means no effect

  -Difficult to target as the potential welfare gain is unknown
• Benefits of Minimum Price

  -Increases wages

  -Makes demerit goods more expensive

  -Reduces the power of monopolies (predatory pricing)

  -Reduces price volatility
• Benefits of Maximum Price


  -Increased supply of socially important goods

  -Increased consumption of merit goods

  -Stops exploitation
• Limitations of Maximum Price


  -Difficult to set at the right level

  -Decrease in quality

  -Shortages, black markets, rationing

  -Requires enforcement
• Limitations of Minimum Price


  -Difficult to set at the right level

  -Encourages production thus increasing cost to the government

  -Requires enforcement

  -Tariffs on cheap imports may impact firms abroad
• Benefits of Tradable Pollution Permits


  -Incentivises firms to decrease pollution

  -Higher tax revenue can be used to mitigate negative externalities

  -Firms are more sustainable long-term

  -Maximise social welfare
• Limitations of Tradable Pollution Permits

  -Difficult to implement

  -Large firms can afford fines

  -Firms can manipulate figures

  -Increased prices for consumers to pay costs

  -Creates a monopoly

  -Ineffective if not all countries do it as firms may outsource production
• Benefits of State Provision of Public Goods 


  -Higher equality

  -Socially important goods are available

  -Goods have intrinsic benefits eg. healthcare mean more labour
• Limitations of State Provision of Public Goods


  -Expensive and high opportunity cost

  -Government may produce the wrong combination of goods

  -Inefficient production as there is no profit incentive

  -Corruption and conflicting objectives
• Benefits of Provision of Information


  -Consumers act rationally so markets operate efficiently

  -Can be used alongside other policies eg. taxation
• Limitations of Provision of Information


  -Expensive so opportunity cost

  -Government lacks perfect knowledge

  -Consumers may have inertia
• Benefits of Regulation


  -Ensures externalities are considered

  -Prevents exploitation of workers

  -Forces firms to provide information

  -Maximises social welfare
• Limitations of Regulations


  -Laws can be expensive to monitor

  -Laws can be inefficient

  -Regulatory capture

  -Firms pass costs to consumers

  -Excessive regulation reduces competition = increased bureaucracy and reduced innovation
• Draw a minimum price diagram for sugar

  Is the minimum price above the equilibrium price? Have you labelled the cost to the government? Why is there a minimum price for sugar?
• Draw a maximum price diagram for houses

  Is the maximum price below the equilibrium? Have you labelled the excess demand/ shortage? Have you considered the PED and PES?