1.4.1 + 1.4.2 Government Intervention and Failure

government intervention

when the gov infiltrate the market to influence market outcomes + correct market failure

types of government intervention

indirect taxes, subsidies, max + min prices, tradable pollution permits, state provision of public goods, provision of information, regulation

advantages of indirect tax

internalises negative externalities and maximises social welfare, raises gov revenue

disadvantages of indirect tax

difficult to know size of externality so difficult to target the tax, conflicts between raising revenue and solving externality, could lead to creation of black market, ineffective if demand is inelastic, taxes are politically unpopular, taxes are regressive

advantages of subsidies

maximises social welfare, can have other positive impacts like encouraging exports + small businesses + equality

disadvantages of subsidies

gov has to spend large amounts of money (opportunity cost),difficult to know size of externality so difficult to target the tax, cqna cause producers to become inefficient, difficult to remove once introduced

maximum price

a legally imposed price for a good that suppliers cannot charge above, they are set on goods with positive externalities. to have an effect it must be set below the current price equilibrium

minimum price

a legally imposed price at which the price of the good cannot of below, they are set on goods w negative externalities. to have an effect it must be set above current price equilibrium

advantages of min/max prices

help increase social welfare and can increase equity/equality

disadvantages of max/min prices

can cause excess supply/demand, difficult for gov to set the price because it is difficult to know size of externality, can lead to creation of black markets

tradable pollution permits

allows the owner to pollute up to a specific amount of pollution and gov controls how many permits there are to limit the max amount of pollution

how tradable pollution permits work

companies have to buy permits to pollute so to cut costs they may switch to greener alternatives. unused permits can be sold to other companies which makes them tradeable

advantages of tradable pollution permits

guaranteed that pollution will fall, can raise revenue, encourages investment in green tech

disadvantages of tradable pollution permits

can be expensive to monitor and police, raise costs for businesses, difficult to know how many permits the gov should allow

advantages of state provision of public goods

corrects market failure by providing important goods, helps equality, benefits of the goods themselves

disadvantages of state provision of public goods

expensive, gov may provide wrong combination of goods, gov may be inefficient in production as there is no incentive to cut costs, gov may suffer from conflicting objectives

advantages of provision of information

the government provides information to help correct asymmetric info. this helps consumers act rationally, can be used alongside other policies

disadvantages of provision of information

expensive, consumers may not listen due to irrational behaviour

regulation

advantages of regulation

consider externalities, prevent exploitation of consumers and allows info to be symmetric

disadvantages of regulation

laws may be expensive, less efficient that tradable pollution permits, firms may pass on costs to consumers, excessive regulation may reduce competition

government failure

when gov intervention in the market leads to net welfare loss and a misallocation of resources

types of gov failure

distortion of price signals, unintended consequences, excessive administration costs, info gaps, public choice theory/ conflicting objectives

distortion of price signals

gov intervention may change price signals and distort the free market mechanism which leads to inefficient businesses being kept and high prices being passed on to consumers

unintended consequences

may cause unexpected effects as consumers and producers react to new policies in unexpected ways

excessive administration costs

the social costs may be higher than the benefits as a lot of money used on basic administration costs

info gaps

the info that the gov has is limited therefore cost ad benefit forecast are often wsrong, casusing a welfare/deadweight loss