1.4 Government Intervention

what are the types of government intervention

• indirect taxation

• subsidies

• maximum and minimum prices

• traceable pollution permits

• state provision of public goods

• provision of information

• regulation

advantages of indirect taxation

• market produces at social equilibrium

• raises government revenue

advantage of subsides

• welfare is maximised

• encourages production

advantages of price floor/ceiling

• allow for some consideration of externalities

• makes goods more affordable, reducing poverty

• makes goods too expensive reducing consumption

advantages of trade pollution permits

• pollution will fall

• raise revenue by selling permits

• encourages efficiency and more green production

advantages of state provision of public goods

• corrects market failure

• ensures everyone has access

• the goods provide benefits to the economy

advantages of provision of information

• helps parties to act rationally

advantages of regulation

• helps overcome market failure ensures everyone

• prevents exploitation of consumers

disadvantages of indirect taxation

• leads to black markets

• difficult to measure

• poor spend more of their income than rich

• politically unpopular

disadvantage of subsidies

• high opportunity cost

• difficult to target

• hard to remove

• dependency of producers

disadvantages of price floor/ceiling

• causes excess supply and demand

• black markets difficult

• hard for government to know where to set prices

disadvantages of tradable pollution permits

• expensive to monitor

• raise costs and in turn prices

disadvantage of state provision of public goods

• high opportunity cost

• wrong combo of goods

• inefficiency of government

• corruption and conflicting objectives

disadvantages of provision of information

• opportunity cost

• government may not have all information themselves

• consumers may not listen

disadvantage of regulation

• administrative costs

• could be less efficient

• cost passed onto consumers

• reduces competition

indirect taxation

• fall in supply and increase in cost to consumer

• maximises social welfare

• internalises externality

subsidies

• lower cost of production

• lowers cost for consumer

maximum and minimum prices

• sets a ceiling/floor for the price products can be sold at

tradable pollution permits

• firms can pollute up to a specific amount

• unused permits can be sold

state provision of public goods

• provides public good which would not be provided by the public sector

provision of information

• the government provides information to allow people to make informed decisions

• may force firms to do the same

regulation

• imposed laws and caps to ensure levels are set where MSB=MSC

• ensures that firms provide full information

causes of government failure

• distortion of price signals

• unintended consequences

• excessive administrative costs

• information gaps from government