8.9

• What is meant by government intervention in markets?


  When government takes action to affect the way markets operate, usually to correct market failure, improve economic efficiency or promote equity
• why do governments intervene in markets?

  • correct market failure
  • redistribute income and wealth
  • protect consumers and workers
  • provide public goods
  • internalise externalities
• what are the main types of government intervention?

  • taxes
  • subsidies
  • maximum and minimum prices
  • tradeable permits
  • state provision (e. healthcare)
  • regulation and legislation
  • information provision
  • buffer stock schemes (for agriculure)
• how do indirect taxes work as government intervention?

  • they increase the cost of production/consumption of demerit goods
  • internalise negative externalities (e.g alcohol, cigarettes)
  • reduce quantity demanded
• how dodo subsidies work as government intervention?

  • reduce production costs, encouraging supply and consumption
  • often used to encourage merit goods (e.g education)
  • can correct underconsumption and improve allocative efficiency
• what is state provision and when is it used?

  • direct government supply of goods/services (e.g NHS, defence)
  • helps provide public good and merit goods where the market fails
  • funded via taxation
• how do trade-able pollution permits help reduce negative externalities?

  • government sets a pollution limits and issues permits
  • firms can trade permits, creating market incentive to reduce pollution
• what are maximum and minimum prices and why are they used?

  • max price: prevent prices from rising too high (e.g rent caps)
  • min price: prevent prices from falling too low (e.g minimum wage)
  • both aim to improve affordability and fairness but can cause shortages or surpluses
• what is regulation and what are its aims?

  • laws/rules imposed to influence economic behaviour
  • used to protect consumers, ensure competition, or reduce externalities
  • can include bans, quality standards or safety checks
• why does the government provide information as intervention?

  • to address information failure (e.g health risks of cigarettes, food labelling)
  • helps consumers make informed choices and improve allocative efficiency
• what is a buffer stock scheme?

  • government buys/sells a commodity to stabilise prices (often in agriculture)
  • help prevent price volatility and protects farmers’ incomes
• what are the benefits of government intervention?

  • corrects market failure
  • reduces inequality
  • promotes public interest
  • encourages long-term sustainability
• what are the potential problems with government intervention?

  • government failure
  • distortion of price signals
  • administrative costs
  • unintended consequences
  • political bias or inefficiency
• tax defintion

  a compulsory levy imposed by the government to pay for its activities. taxes can be used to achieve other objectives, such as reduced consumption of demerit goods
• price ceiling definiton

  a price above which it is illegal to trade. price ceilings or maximum legal prices, can distort markers be creating excess demand
• price floor definition

  a price below which it is illegal to trade. price floors, or minimum legal prices, can distort markets by creating excess supply
• Tradable pollution permits defintion

  A method of government intervention where the government issues firms with a permit to pollute such as CO2
• what are the reasons for imposing price ceilings?

  • protecting consumers - remain affordable
  • Controlling inflation - can erode purchasing power
  • Political reasons - may be used by govs to gain political support from the population by appearing to take action against rising costs
• what are possible consequences of a price ceiling?

  • shortages - demand exceeds supply, leading to rationing
  • inefficient resource allocation
  • welfare impacts
  • underground markets - shortages lead to emergence of black market
  • non-price rationing - govs or sellers use methods like queuing or waiting lists to distribute the limited supply
• what are some reasons why price floors would be imposed?

  • protecting producers
  • Encouraging production - provides incentive for producers to increase production
  • Reducing consumption - higher prices = lower demand, helping address negative externalities associated with their consumption
  • Correcting monopsony power - single buyer has excessive power to dictate prices
• what are some consequences of price floors?

  • surplus production - wasted resources or increased storage costs
  • inefficiency resource allocation - overproduction in certain sectors, minimum price can lead to misallocation of resources, as factors of production are not being directed towards their most efficient use
  • higher prices for consumers - may disproportionately impact low income households