Other Methods of GovIntervention

What is state provision?

When the government provides goods/services directly.

Why does the government provide goods?

Because markets under-provide:

• Public goods

• Merit goods

What are public goods?

Goods that are:

• Non-excludable

• Non-rival

Why are public goods not provided by the market?

Because of the free rider problem (people use without paying).

What are merit goods?

Goods that are benificial for society but under-consumed.

Why are merit goods under-consumed?

People cannot afford them or don’t realise their benefits.

Benefits of state provision?

• Free at point of use

• Accessible to all incomes

• Reduces inequality

• Includes external benefits

Main disadvantage of state provision?

High opportunity cost (money could be used elsewhere).

What problem occurs with free services?

Excess demand → long waiting times. e.g NHS waiting lists

What is regulation?

Government rules to control behaviour in markets

Why regulate markets?

To reduce:

• Externalities

• Exploitation

• Monopoly Abuse

What are common pool (access) resources?

Natural resources over which no public ownership has been established.

What issue can this lead to?

The tragedy of the commons, where these resources are exploited and used in an unsustainable way.

What do property rights do?

They define the ownership of common pool resources and set out how they can be used

How can property rights prevent the tragedy of the commons?

By changing common land to private land, the private owner has a strong incentive to manage the resource and take care of it for future use, Internalising the externality.

Why may this be difficult?

Allocating rights in a fair (equitable) way can be difficult

Regulating and enforcing the property rights is expensive

What are pollution permits?

Licences that allow firms to pollute a limited amount.

How does the system work?

Government sets pollution limit

Firms trade permits

Price is set by supply and demand

What happens if firms pollute too much?

They must buy extra permits

How do permits reduce pollution?

They make pollution more expensive —> Firms reduce output or invest in cleaner tech

What is the key overall aim of all these policies?

To move output closer to the socially optimal level.