1.4 Government Intervention

Advantages of Indirect Tax

• Internalises the externality so social welfare is maximised

• Raises government revenue

Disadvantages of indirect tax

• Difficult to target the tax

• Could lead to a black market

• Could be conflict between the government goal of raising revenue and solving the externality

• Taxes are politically unpopular, so governments may be reluctant

• They are regressive, meaning the poor spend a larger proportion of their income on indirect taxes than the rich do

Advantages of subsidies

• Society reaches the social optimum and welfare is maximised Raises government

• They can have other positive impacts like encouraging small business

Disadvantages of subsidies

• The government has to spend a larger proportion amount of money, which will have a high opportunity cost

• They are difficult to target

• Subsidies can cause producers to become inefficient

• Once introduced, subsidies are difficult to remove

Advantages of maximum and minimum prices

• Can help increase social welfare and allow for some consideration of externalities

• A maximum price will ensure that goods are affordable, and minimum ensures a fair price for producers

• Can reduce poverty and increase equity/equality

Disadvantages of maximum and minimum prices

• Can cause excess supply/demand due to distortion of price signals

• Difficult for government to know where to set the prices

• Both can lead to the creation of black markets

Advantages of pollution permits

• Guaranteed that pollution will fall, as the government can cap the number of permits

• Government can raise revenue by selling permits and by fining firms who exceed their limit

• Firms can make their own decisions about whether to reduce pollution or not, helps encourage efficiency

Disadvantages of pollution permits

• Can be expensive to monitor and police, and will only work if this is done well

• Will raise costs for businesses, with higher prices being possibly passed onto consumers

• Can be difficult to know how many permits the government should allow

Advantages of state provision of public good

• Corrects market failure

• Can help bring about equality

• The goods themselves will have benefits eg/. Healthcare

• Government can ensure efficiency using competitive tenders

Disadvantages of state provision of public good

• Expensive and represents a high opportunity cost for the government

• The government may produce the wrong combination of goods

• Government may be inefficient in production since they have no incentives

• Government officials may suffer from corruption and conflicting objectives

Advantages of provision of information

• Helps consumer act rationally

• Can be used alongside other policies

Disadvantages of provision of information

• Can be expensive - opportunity cost

• The government may not always have all the information, making them an imperfect informer

• Consumer may it listen to the information due to irrational behaviour

Advantages of Regulation

• Ensure the consideration of externalities

• Prevent exploitation of consumers

• Will help overcome market failure and maximise social welfare

Disadvantages of regulation

• Laws may be expensive for the government to monitor - opportunity cost

• Regulation is a less efficient method of reducing pollution

• Firms may pass on costs to consumers

• May reduce competition in a market and efficiency if excessive

Distortion of price signals

The price mechanism aims to allocate resources to their best use and where consumer want and value them most highly. By intervening, the government distorts this and so resources may be allocated inefficiently.

Unintended consequences

Some intervention cause effects which the government did not intend to happen

Excessive administration costs

The social costs of administration costs may be higher than social benefits