Edexcel Economics A-level - Government Intervention

Flashcards covering government intervention in markets, including taxation, subsidies, price controls, pollution permits, state provision, information provision, regulation, and government failure.

What is the purpose of indirect taxation in addressing market failure?

To internalize negative externalities by increasing costs to individuals, shifting the supply curve and aligning market outcomes with the social optimum.

What are the advantages of using indirect taxation to correct negative externalities?

Internalizes the externality, maximizes social welfare, and raises government revenue that can be used for other solutions.

What are the disadvantages of using indirect taxation to correct negative externalities?

Difficulty in knowing the size of the externality, potential conflict between raising revenue and solving the externality, risk of creating a black market, ineffectiveness if demand is inelastic, political unpopularity and can be regressive.

How do subsidies address positive externalities and information gaps?

By lowering the cost of production, shifting the supply curve to the right, and encouraging production at the social optimum level.

What are the advantages of using subsidies to correct positive externalities?

Reaching social optimum output, welfare maximization, encouraging small businesses, bringing about equality, and encouraging exports.

What are the disadvantages of using subsidies?

High government spending with high opportunity cost, difficulty in targeting the exact size of the externality, potential for producers to become inefficient, and difficulty in removing subsidies once introduced.

What is the purpose of maximum and minimum prices?

Maximum prices are set below the equilibrium to ensure affordability (positive externalities), while minimum prices are set above the equilibrium to discourage consumption (negative externalities) or encourage production (social benefits).

What are the advantages of setting maximum and minimum prices?

Considers externalities, helps increase social welfare, ensures affordability (maximum price), and ensures fair prices for producers (minimum price), which can reduce poverty and increase equity/equality.

What are the disadvantages of setting maximum and minimum prices?

Distortion of price signals, excess supply/demand, difficulty for the government to know where to set the prices, potential for creating black markets, illegal bribes, or discriminatory policies.

How do tradable pollution permits work to reduce pollution?

By allowing companies to pollute up to a specific amount and incentivizing them to cut costs and increase profits by using greener technology.

What are the advantages of using tradable pollution permits?

Guarantees that pollution will fall to the targets set by the government, raises government revenue, encourages companies to invest in green technology, and allows firms to make their own decisions about cutting pollution or buying more permits.

What are the disadvantages of using tradable pollution permits?

Expensive to monitor and police, raises costs for businesses (which may be passed onto consumers), and difficulty in knowing how many permits the government should allow.

What is the rationale behind state provision of public goods?

To correct market failure due to the non-excludable and non-rivalry nature of public goods, which leads to under-provision by the free market.

What are the advantages of state provision of public goods?

Corrects market failure, improves social welfare, helps bring about equality, provides benefits of the goods themselves (e.g., healthcare), and can ensure efficiency by using competitive tenders.

What are the disadvantages of state provision of public goods?

Expensive, represents a high opportunity cost for the government, potential for producing the wrong combination of goods because consumers can't indicate their preferences, inefficiency in production, and potential for corruption and conflicting objectives.

How does the provision of information by the government correct market failures?

By addressing asymmetric information, allowing people to make informed decisions, and forcing companies to provide information.

What are the advantages of government-provided information?

Helps consumers act rationally, allows the market to work properly, and complements other policies by making demand more elastic in the long run.

What are the disadvantages of government-provided information?

Can be expensive, the government may not always have all the information, and consumers may not listen to the information provided.

How do regulations correct market failures?

By imposing laws and caps to ensure levels are set where MSB=MSC or to ensure that companies provide full information on products.

What are the advantages of using regulations?

Ensures consideration of externalities, prevents consumer exploitation, keeps consumers fully informed, helps to overcome market failure, and maximizes social welfare.

What are the disadvantages of using regulations?

Laws may be expensive for the government to monitor, they don’t take into account the different costs of following the laws for different companies, can suffer from regulatory capture, firms may pass on costs to consumers, and excessive regulation may reduce competition and efficiency.

What is 'government failure'?

When government intervention in the market leads to a net welfare loss and a misallocation of resources.

How can distortion of price signals lead to government failure?

By keeping inefficient companies in business (subsidies) or making consumers pay too much for a good (taxes), distorting the free market mechanism.

How can unintended consequences lead to government failure?

When consumers and producers react to new policies in unexpected ways, negating the intended effect of the policy.

How can excessive administration costs lead to government failure?

When a significant portion of allocated funds is used up on basic administration costs, leading to social costs higher than social benefits.

How can information gaps lead to government failure?

When decisions are based on limited or inaccurate data, leading to investments where costs are higher than benefits and resulting in welfare loss.