Government intervention and government failure 1.3

• what is government intervention

  Government intervention is used to correct market failures arising from an inefficient resource allocation.
• what are the 5 forms of government intervention

  Subsidies

  Taxation

  Regulation

  Information

  Pollution permits

  State provision
• what are 2 drawbacks of government intervention

  - firms may deter from the uk market

  
  

  - intervention can be costly to the government which creates an opportunity cost for how the gov spend their money
• what are pollution permits


  pollution permits are allocated to busninesses in attempt to control pollution levels
• what are 2 pros of pollution permits

  - limit the negative externalities

  
  

  -gov can make revenue
• 2 drawbacks of pollution permits

  - there is a cost to implementing the scheme

  
  

  - too low of
• what is regulation


  regulation is the process of imposing rules that firms must comply with.
• what are 2 pros of regulation

  -regulation can correct market failures that arise from externalities

  
  

  -legislation provides a means of punishing firms
• what are 2 drawbacks of regulatiion

  - it can be expensive for the gov to investigate firms in order to know whether to regulate them

  
  

  - high amounts of 'red tape' in a market can deter firms from entering it which could damage the uks international competitiveness
• what is the aim of a maximum price

  a maximum price is a policy to increase the consumption of a good
• what is required when imposing a maximum price

  the maximum price must be below the market equilibrium
• 2 drawbacks of maximum price

  - may deter firms from that specific market

  
  

  - firms may cut costs in attempt to maximise profit resulting in a fall in quality
• pro of maximum price

  - prevents consumers from being exploited
• what does a maximum price cause

  more demand but less supply resulting in exess demand
• what is the aim of a minimum price

  minimum prices are imposed in order to protect producers such as farmers and guarantee they are paid a livable amount
• what is required when imposing a minimum price

  minimum price must be above the market equilibrium
• what does a minimum price cause

  less demand but more supply resulting in exess supply
• what is a pro of minimum price

  guarentees producers get a reasonable price for their product
• what are 2 drawbacks of minimum price

  - consumers will be paying more for their goods

  
  

  - resources will be allocated inefficiently - they could've been used for something else but instead get used for excess supply
• what drawback can price controls cause

  blackmarket
• what is a buffer stock

  a buffer stock scheme is a policy used to stabilise prices of commodities by govs buying up exes stock when supply is high in order to sell it back onto the market when supply is low
• hy are buffer stocks profitable in principle

  goods are bought when supply is high, resulting in a low price, and sold when supply is low, resulting in a high price.
• why are buffer stocks important

  they help maintain a stable price for food
• why would producers be able to take advantage of imposing higher prices due to having low supply

  commodities are typically demand inelastic
• what do the government have to set in order to know when to buy supply

  a target price range
• what are 2 drawbacks of buffer stick schemes


  - if the commodities are perishable, the government may be wasting their money

  - if their are multiple consecutive poor harvests, buffer stocks many run out
• what is competition policy

  competition policy aims to reduce the amount of anti-competitive behavior in markets in order to protect consumers and producers
• what government agency protects competitive markets in the uk


  the competition and markets authority (CMA)
• what form of market failure does competition policy prevent

  monopolies
• what is a monopoly according to the CMA

  the CMA describes a monopoly as any firm with over 25% market share
• what is a monopoly in its purest form


  a firm that dominates the whole market (with 100% concentration)
• why are monopolies so bad

  monopolies can be allocatively inefficient since they can restrict quantity and raise price to a level that isnt allocatively efficient
• how can govs prevent monopolies

  govs can prevent monopolies by blocking mergers that would result in monopoly
• what powers do the CMA have to decrease the power of large firms

  - price ceilings

  -splitting up firms that have become too powerful

  -blocking mergers
• why do govs encourage competition

  govs encourage competition because it leads to higher quality and lower price goods and services.
• what is the limit to competition policy

  it requires trustworthy, high-quality information to take action against anti-competitive behaviour.
• what is an example of the CMAs intervention

  The CMA has blocked the Sainsbury's / Asda merger after finding it would lead to increased prices in stores, online and at many petrol stations across the UK.
• what are the 8 types of government failure

  R egulatory capture

  A dministrative cost

  P olicy myopia

  C onflicting objectives

  D isincentive effects

  L aw of unintended consequences

  I mperfect information

  P olitical self interest
• what is regulatory capture

  when a regulatory department takes the side of the producer over the consumer
• what is administrative cost

  the cost of imposing regulation