1.4 Government intervention

• What are the types of intervention methods the government could take?

  Indirect taxes, Subsides, Price control, Provision of public goods, Correcting information failure, Regulations
• What is the aim of indirect taxes?

  Internalise the externality by taxing the product the product so that output and consumption are at the the level where private and social benefits are equal
• What are advantages to indirect taxes?

  Incentive to reduce pollution, Source of revenue for the government, Few administrative costs involved
• What are disadvantages to indirect taxes?

  Ineffective in reducing pollution if demand is price inelastic, Increased business cost, Difficulty of setting an appropriate tax because of the problem of quantifying the external cost
• What is a subsidy?

  A grant to business given by the government to reduce production costs
• When are subsidies used?

  In the case of external benefits of production
• What do subsidies do?

  Encourages production so that the socially optimal level is reached
• What are advantages to subsidies?

  Reduction in cost of production enabling suppliers to reduce price, Incentive for people to increase consumption, Might help reduce inequality
• What are disadvantages to subsidies?

  Cost to the taxpayer of providing subsidies, Ineffective in increase consumption if demand is inelastic, Difficulty of setting an appropriate subsidy because of the problem of quantifying the external benefit
• What is a maximum price?

  A price which makes it illegal for firms to charge more than a certain price for a given quantity of a product
• What do maximum prices lead to?

  A shortage of supply resulting in excess demand
• What could a shortage of supply lead to?

  A black market which those with supplies could sell it illegally at a higher price
• What are advantages of maximum prices?

  Enable consumers on low income to be able to afford to buy a product, Help prevent an increase in the country's rate of inflation, Prevent exploitation of consumers by monopolies
• What are disadvantages of maximum prices?

  Danger that shortages could mean consumers are unable to find supplies of the product, Producers may exit the market to use their resources to produce more profitable goods, If subsidised, there will be a significant cost to taxpayer
• What are minimum prices?

  A price floor which firms can't sell below
• What do minimum prices lead to?

  A surplus in the quantity demanded which leads to excess supply
• How can minimum prices be used?

  • Commodities: Producers will know in advance that they will receive a certain price per kilo no matter how much is produced
  • Consumer goods: Used to deter consumption by setting minimum price quite high
  • Labour market: Countries have a national minimum wage to ensure that workers receive a minimum amount per hour
• What are advantages of minimum prices?

  Producers know in advance the price they will receive for their product, The greater certainty enables producers to plan investment and output, Can prevent exploitation of producers by wholesalers and retailers who have significant buying power
• What are disadvantages of minimum prices?

  If the minimum price is set too high then there will be surpluses each year, Schemes involve costs of storage which must be borne by taxpayers, Schemes encourage over-production and may result in an inefficient allocation of resources
• What are tradable pollution permits?

  Rights to sell and buy actual or potential pollution in artificially created markets
• What do tradable pollution permits try to do?

  Reduce external costs
• What are advantages to tradable pollution permits?

  Schemes work through the market mechanism, Incentive for firms to reduce pollution, Costs of administering these schemes are low, Can be a planned reduction in pollution overtime
• What are disadvantages to tradable pollution permits?

  Pollution will continue, Large, efficient firms might buy up the permits and continue to pollute, They need to be internationally enforced to be effective, Might make country's goods less internationally competitive
• What does state provision of public goods do?

  Ensures the product/service is provided
• What are regulations?

  Laws that control the way that a business can operate to reduce market failure
• What are advantages to regulations?

  Regulation can limit the amount of pollution, Might act as an incentive to producers to develop new technologies that reduce pollution, Limit external costs without an impact on price
• What are disadvantages to regulations?

  Enforcement of laws/regulations costs, Problem of determining the socially efficient level of pollution, Limits consumer sovereignty
• What is government failure?

  When government intervention results in a net welfare loss
• What are causes of government failure?

  Distortion of price signals, Unintended consequences, Excessive administrative costs, Information gaps
• What are ways there have been government failure?

  Indirect taxes, Agricultural stabilisation schemes, Housing policies, Environmental policies