1.4 government intervention

Why are indirect taxes introduced

To address negative externalities and prevent market failure

How do indirect taxes affect the supply curve

They shift the supply curve to the left, increasing costs and reducing output

What is an advantage of indirect taxes

They internalize the externality, moving production to the social optimum

What is a disadvantage of indirect taxes

They are regressive and may disproportionately impact the poor

Name examples of indirect taxes in the UK

Landfill tax, fuel duty, alcohol duty, tobacco duty, and sugar tax

Why are subsidies introduced

To address positive externalities and reduce costs of production

How do subsidies affect the supply curve

They shift the supply curve to the right, reducing price and increasing output

What is an advantage of subsidies

They maximize social welfare by achieving the social optimum output

What is a disadvantage of subsidies

They have high opportunity costs and can make producers inefficient

Name examples of subsidies in the UK

Subsidies for biofuels, solar panels, wind farms, and railways

What is a maximum price

A legally imposed price that suppliers cannot exceed, set below equilibrium

What is a minimum price

A legally imposed price that goods cannot fall below, set above equilibrium

What is an advantage of maximum prices

They ensure affordability for essential goods, such as food or rent

What is a disadvantage of maximum prices

They create excess demand, leading to shortages and black markets

What is an advantage of minimum prices

They ensure producers receive a fair price, discouraging overconsumption

What is a disadvantage of minimum prices

They create excess supply, leading to surpluses and resource wastage

What are tradable pollution permits

Permits allowing firms to emit a limited amount of pollution, which can be traded

What is an advantage of tradable pollution permits

They guarantee a reduction in pollution to the government’s set limit

What is a disadvantage of tradable pollution permits

They are expensive to monitor and enforce effectively

Name an example of a successful pollution permit scheme

The US Sulphur Trading Scheme reduced sulphur dioxide emissions by 40%

Why does the government provide public goods

To address market failure due to the free rider problem

What is an advantage of state provision

It improves equality and ensures access to essential services

What is a disadvantage of state provision

It can be inefficient and lead to resource misallocation

Why does the government provide information

To reduce information gaps and help consumers make rational decisions

What is an example of government

provided information

What is a disadvantage of information provision

It can be expensive and may not be effective if consumers ignore it

What is regulation

Laws and caps to correct market failure and ensure fair practices

What is an advantage of regulation

It can prevent exploitation and ensure firms consider externalities

What is a disadvantage of regulation

It can be expensive to monitor and enforce, with high opportunity costs

Name examples of regulations in the UK

EU fishing quotas, smoking bans, and vehicle CO2 emission caps

What is government failure

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

What causes government failure

When the total social costs of intervention exceed the social benefits

How does government intervention distort price signals

By altering the free market mechanism, leading to inefficient resource allocation

What is an example of distorted price signals caused by subsidies

Subsidies keep inefficient farmers in business, preventing resources from moving to better uses

What is the effect of maximum and minimum prices on resource allocation

They lead to excess demand or supply, disrupting the price mechanism

What are unintended consequences in government intervention

Outcomes that were not anticipated, causing the policy to fail in achieving its goals

Give an example of unintended consequences in the EU agricultural policy

The EU Common Agricultural Policy led to overproduction and price dumping in other markets

How did NHS targets lead to unintended consequences

Focus on targets reduced the quality of care, contrary to the government’s intent

What is an issue with excessive administration costs

A significant portion of funds is used for administration rather than achieving the policy’s goals

Give an example of excessive administration costs in the UK

NHS funds are often spent on organizational administration rather than medical care

Why do information gaps lead to government failure

The government may make decisions based on incomplete or inaccurate data

Give an example of how information gaps cause welfare loss

Inaccurate forecasts of infrastructure use can result in projects where costs outweigh benefits

How do subsidies for farmers illustrate government failure

They support inefficient producers, leading to wasted resources

How did the EU Common Agricultural Policy contribute to government failure

Overproduction led to environmental damage and global market distortions

What is regulatory capture

When regulatory agencies prioritize the interests of industries they regulate over the public

How do price controls cause government failure

Maximum prices create shortages, while minimum prices create surpluses.