Government intervention

To correct externalities

a government can use taxation or subsidies to influence the level of consumption or production of a good or service

Advantages of taxation for consumers

Reduced consumption of goods with external costs, leading to lower costs to third parties

Disadvantages of taxation for consumers

"Sin Taxes" often affect low-income consumers disproportionately, worsening inequality

advantages of taxation for producers

Producers are forced to pay for external costs associated with emissions from production of harmful goods

disadvantages of taxation for producers

Producers may be forced to make some workers redundant as output falls due to the higher costs of production

advantage of taxation for governments

Raises revenue for government programs

Could be used to fund healthcare and education initiatives about the consumption of goods with external costs

disadvantages of taxation for governments

may create illegal markets as consumers seek to avoid paying the taxes

subsidies

attempt to increase the output and consumption of specific goods or services that have external benefits

a subsidy

A government payment to a firm thatreduces the costs of production and encourages an increase in the output of a good or service

advantage of subsidies for consumers

- lowers prices

- increases demand for goods with positive externalities

- helps to change destructive consumer behaviour over a long period of time

disadvantage of subsidies for consumers

subsidies may disproportionately benefit only higher income consumers

advantage of subsidies for producers

Can be targeted so as to help specific domestic industries

disadvantage of subsidies for producers

Subsidies can discourage firms from becoming more efficient or competitive, as they become reliant on financial assistance from governments

advantage of subsidies for governments

It helps achieve environmental aims

It helps reduce carbon emissions and improve air quality

disadvantages of subsidies for governments

There is an opportunity cost associated with government expenditure

Regulation

process of monitoring and enforcing laws aimed at limiting harm caused by the external costs of consumption or production

reasons for regulation

Reasons for regulation include preventing exploitation of consumers, taking externalities into account, and reducing consumption of negative externality goods and services

Advantages of regulation

New laws and regulations can be targeted on specific markets and industries

Individuals or firms may be fined/imprisoned for breaking the rules

They help reduce the external costs of negative externalities

Fines can generate extra government revenue

Regulations imposing fines act as a strong deterrent, encouraging individuals and businesses to comply with the ban

Disadvantages of regulation

Regulating laws requires the government to hire more people to work for regulatory agencies

Regulation can be difficult as it is a complex process to determine if firms/consumers are breaking the laws

The regulation may create underground (illegal) markets, which could generate even higher external costs on society

Some of the laws may be unpopular with large corporations that have strong political power

Some of the laws may be unpopular with voters to the point where it may influence their vote in the next election

Governments calculate an

optimum level of pollution that is acceptable in society

governments issue permits to polluting firms and then create a market where firms can buy and sell their pollution permits to generate extra company revenue. the price is determined by demand and supply

Advantages of pollution permits

- reduces pollution

- increased government revenue

- encourages firms to switch to greener production methods

Disadvantages of pollution permits

Firms may relocate production to places where they can pollute without limits.

- expensive and difficult to monitor emissions

- firms may pass higher production costs to consumers

- firms might cheat and hide their pollution to avoid penalties

- there is little incentive to reduce pollution.

Competition policy

Regulations designed to promote competition and restrict monopoly practices.

promoting competiton

- promotion of small business by tax incentives or subsidies

- deregulation

- competitive tendering for government contracts

-privatisation

protecting consumer interests

- protecting from faulty goods, false advertising, unfair business practices.

- protect from false and misleading claims

- protect consumers data & privacy

limiting monopoly power

- compulsory break-up

- price regulation

- profit regulation

- taxation

- public (state) ownership

control mergers and takeovers

- prevent monopoly being created

- prevent consumers being exploited in markets

- monitor merger and takeover activity

advantages of competition policies

- increase competition may lead to fall in market price

- firms work on better quality products and customer service to avoid losing market share

- firms invest in R&D and increase innovation to improve production and lower costs.

Disadvantages of Competition Policies

- reduces monopoly power and profits that could be used to invest in R&D

- prevents firms from realising huge economies of scale which may be passed to the consumer as lower prices

- may lead to government failure

Reasons for minimum wage

1. Raises income for low paid workers

2. Benefits disadvantaged workers

3. Less welfare/benefit claims for lower income workers

4. Motivate workers

5. Increased productivity by replace workers with

machinery

Advantages of minimum wage

- reduces poverty by raising the living standard of the lowest paid workers

- prevents exploitation of workers who have poor bargaining strength in the labour market i.e. no access to trade unions

- increase consumption in the economy

- may incentivise workers to be more productive

- overall living standard may improve

disadvantage of minimum wage

- raises cost for production for firms that may respond by raising the price of goods and services

- firms may lay off some works

- Government tax revenues may fail