government intervention - increase consumption/production

government intervention

merit goods

good that are deemed more beneficial than consumers realise

policies to increase consumption/production

1. subsidies

2. nudges

3. regulation

4. replace the market

subsidies

when the government pays for part of production; this will increase supply, decrease the price and increase production

pros of subsidies

market based solutionc

cons of subsidies

1. expensive to taxpayer

2. anti-competitive

3. opportunity costs

4. administration costs

nudges

encourage consumers and producers to alter their behaviour

pros of nudges

1. cheap

cons of nudges

1. not guaranteed to work

regulation

set maximum price, pass laws to enforce consumption such as vaccinations, schooling

pros of regulation

1. effective

cons of regulation

1. creates excess demand

2. black/shadow markets arise

3. expensive to police

4. overrides market mechanism

replace the market

take the industry into public ownership

pros of replacing the market

1. full control

cons of replacing the market

1. creates monopoly

2. “anti-market”

3. risks government failure

evaluative point for subsidy

success depends on price elasticity

evaluative point for nudges

a “light touch” solution; government avoids accusations of interfering excessively

evaluative points for regulation

problems with shadow markets e.g. inequitable allocation (goods to richest not most needy)

gov regulation should only be used for serious cases; weigh up the costs and benefits

evaluative point for replacing the market

historically shown not to work and politically unpopular