7. Government Intervention + Failure

What are the nine government intervention policies?

• Regulation

• Extended property rights

• Tradable permits

• State provision

• Indirect taxes

• Subsidies

• Max prices

• Min prices

• State provision of info

What are the two methods of regulation?

• Prohibition - bans

• Restriction - limits on the production of goods / amount of pollution

What are two advantages + two disadvantages of regulation?

Adv:

• Can decrease exploitation of the consumer

• Can decrease asymmetric info

• Possible to shut down companies from making negative actions

Dis:

• Admin costs

• Valuation problem

What are extended property rights?

The government allocates ownership rights to organisations of resources (e.g air, rivers, seas) so the resources have legal protection (e.g environment agency)

What are two advantages + two disadvantages of extended property rights?

Adv:

• Increased expertise

• Decreased burden on the gov

Dis:

• High legal costs of persecutions

• Externalities difficult to trace

What are tradable permits?

1. The gov sets a limit on the amount of pollution allowed in an industry (quota)

2. Allocates permits to firms

3. Market sets up for permits

4. Permits decreased over time to reduce pollution

What are two advantages + two disadvantages of tradable permits?

Adv:

• Internalises the externality

• Increased tax rev for gov

• Incentive to invest in clean tech

Dis:

• Valuation + quantity problem

• Increased production costs

What is state provision?

The gov provides public goods

What is an advantage + two disadvantages of state provision?

Adv:

• Increased health + safety

Dis:

• Inefficiency

• Cost to taxpayer

What is the specific tax diagram?

What is the ad valorem tax diagram?

What are two advantages + two disadvantages of indirect taxes?

Adv:

• Internalises the externality

• Increased tax rev

Dis:

• Valuation problem

• May force firms out of business → negative effects on whole economy

What are two advantages + two disadvantages of subsidies?

Adv:

• Internalises the externality

• Incentive to invest in new tech

Dis:

• Expensive for the gov

• Inefficient if firms rely on subsidies

What are two advantages + two disadvantages of max prices?

Adv:

• Stops exploitation of the consumer → helps decrease inequality

• Stabilises the market

Dis:

• May create excess demand

• Monitoring costs

What are two advantages + two disadvantages of min prices?

Adv:

• Stops exploitation of the producer

• Decreased consumption of demerit goods

Dis:

• May create excess supply

• Increased prices for consumers

What are two advantages + two disadvantages of state provision of info?

Adv:

• Decreased asymmetric info

• Decreased consumption of demerit goods

Dis:

• Cost to the gov

• Some may ignore / not use services

What does government failure mean?

Government intervention in a market leads to a net welfare loss rather than a gain

What are the four forms of government failure + examples?

• Distortion of prices signals (e.g min/max prices)

• Unintended consequences (e.g smuggling, firms depend on subsidies)

• Excessive admin costs

• Info gaps (e.g when choosing unis)