1.4 government intervention

why govts intervene

• to overcome market failure

• to improve distribution of resources

• avoid excessive price for goods

• discourage demerit goods/encourage merit goods

• promote competition and contestability

methods of Govt intervention

• Subsidies

• Taxation

• Regulation

• Information

• Price control

• Pollution permits

• State provision

taxation

a fee charged by the government on a product, income or activity

direct taxes

taxes that cannot be avoided - icnome tax, corporation tax

indirect taxes

taxes levied on goods and services - VAT,excise duties

• specific

• Ad valorem

how does tax help with negative production externalities

advantages of taxation

• source of revenue for the government

• low admin costs to collect

• may reduce negative externalities

disadvantages of taxation

• however ineffective if demand is inelastic

• increased costs for businesses

• hard to calculate quantity

subsidies

money paid by government to encourage production of merit goods i.e reduce costs of production

subsidies effect on positive consumption externalities

examples of subsidies

• payments to local bus companies to operate loss-making services in rural areas

• payments to setting up in high unemployment areas

• winter fuel payments to peao

advantages of subsidy

• reduce production costs

• lower prices

• incentive to increase consumption

• might reduce inequality

disadvantages of subsisidy

• cost to the taxpayer

• ineffective if inelastic demand

• quantifying external benefits - hard to calculate external benefits

regulation

the laws set by government to affect the behaviour of firms or organisations

what will happen if firms fail to comply with regulation

result in sanctions ranging from written warnings to prison terms

provision of information

supplying or sharing information with someone

government often provide info to consumers to ensure informed decisions

price control

restrictions imposed by governments to ensure that goods and services remain affordable

maximum price

price set below equilibrium which stops it from moving upwards therefore acts as a price ceiling

causes excess demand

minimum price

price set above equilibrium which stops it from moving downwards therefore acts as a price floor

causes excess supply

pollution permits

a tradable permit - a permit that allows the owner to emit a certain amount of pollution and that if unused or partially used can be sold to another polluter

state provision

goverenment finances the production of a range of products through taxation and then provides them free or nearly free to consumers

e.g.

education

health care

govt failure

when governemnt intervenes in markets or economics activities that leads to an outcome that reduces overall economic welfare

types of govt failure

• distortion of price signals

• excesssive administration costs

• unintended conseuquences

• information gaps