1.8.8 Government intervention in markets

• Externalities occur when the production or consumption of a good or service imposes costs or benefits on third parties
• What imbalance does asymmetric information create in a transaction?

  Information imbalance
• Match the market failure with its example:

  Externalities ↔️ Pollution from a factory

  Public Goods ↔️ National defense

  Asymmetric Information ↔️ Used car sales

  Monopoly Power ↔️ Utilities
• Regulation involves the government setting rules and standards to influence market behavior
• Subsidies are used to encourage desirable activities by lowering their costs.


  True
• Steps to address market failures using government intervention:

  1️⃣ Identify the market failure

  2️⃣ Choose the appropriate intervention tool

  3️⃣ Implement the policy

  4️⃣ Monitor the impact
• A price ceiling is the maximum legal price that can be charged
• Price controls can distort the efficient allocation of resources determined by the free market.

  True
• What is market failure caused by?

  Inefficient resource allocation
• Public goods are excludable and rivalrous

  False
• Monopoly power leads to higher prices and reduced output
• What is the purpose of government intervention in markets?

  Address market failures
• What is the primary purpose of taxation in government intervention?

  Discourage undesirable activities
• State provision involves the government directly providing public goods and services
• What does information provision address in government intervention?

  Information asymmetries
• Price controls are government-imposed limits on market prices.


  True
• What is the effect of a price floor on supply and demand?

  Creates surpluses
• Give an example of an externality that affects nearby residents.

  Pollution from a factory
• Public goods are non-excludable and non-rival
• Government intervention is always necessary to address market failures.

  False
• Information provision is used to address information asymmetries.


  True
• A price ceiling creates shortages because demand exceeds supply
• Price controls can distort market efficiency and create unintended consequences.

  True
• What is the effect of a tax on producers or consumers?

  Increases costs
• Subsidies lower costs for producers
• What is an example of a government subsidy?

  Renewable energy subsidies
• Environmental regulations address the externality of pollution.


  True
• Match the type of market failure with an example:

  Externalities ↔️ Pollution from a factory

  Public Goods ↔️ National defense

  Monopoly Power ↔️ Utilities companies

  Asymmetric Information ↔️ Used car market
• Public goods are non-excludable and non-rival
• What is an example of a tax used to discourage negative activities?

  Carbon tax
• A price ceiling creates a market shortage
• What is the primary effect of subsidies on producers or consumers?

  Lowers their costs
• Match the policy tool with its example:

  Regulation ↔️ Food safety standards

  Legislation ↔️ Consumer protection laws
• What is the purpose of regulation in markets?

  Influence market behavior
• The government uses regulation to influence market behavior
• Match the type of intervention with its definition:

  Regulation ↔️ Government sets rules and standards

  Taxation ↔️ Government imposes taxes

  Subsidies ↔️ Government provides financial support
• Taxation by the government increases costs for producers and consumers
• Match the type of intervention with its impact on the market:

  Taxation ↔️ Decreases supply and demand

  Subsidies ↔️ Increases supply and demand

  Regulation ↔️ Corrects externalities and monopolies

  State Provision ↔️ Ensures public goods are supplied
• Government interventions aim to correct market failures and promote equity


  True
• Taxation is most effective when it avoids unintended consequences