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1.4 - Government intervention - Coggle Diagram
1.4 - Government intervention
Government Intervention in markets (2)
Trade pollution permits
- are rights to sell and buy actual or potential pollution in artificially created markets
Permits are given by the government that allows firms to pollute upto a certain amount. These permits can be traded between firms so companies won't go over the limit and get a fine
these schemes work through the market mechanism
incentive firms to reduce pollution
pollution will continue, even if its at a lower rate
Large inefficient firms could guy all the permits and pollute a lot
State provision of public goods
This means they have complete control over where and how much public goods are provided. The government can also contract public goods for other firms to make
The state provides almost all the public goods, with the taxpayer's money, because they can't be provided by the free market.
Provision of information
The government close Information gaps that occur all the time such as:
encouraging vaccinations
tell people about risks of alcohol and smoking
opportunities of apprenticeships and higher education
these is a cost involved with this
the policy may not always be effective
Regulations
The government imposes regulations such as:
a ban on certain products
limits on when and where things can occur
age restrictions on certain products
can incentivize producers to make advancements in tech and create less pollution
encourages consumers to make better choices
there is s cost to implementing these and enforcing them
problems of determining the socially efficient level of doing things for everyone
Property rights
- are the exclusive authority to determine how a resource is used. In simpler terms they are ownerships rights
initial problem of assigning the rights
could cause expensive legal procedure if contract is breached
costs are lower than forms of regulations
provided opportunity to fine firms to create revenue if they didn't do as asked
Government Intervention in markets (1)
Indirect taxes are taxes on expenditures including VAT and taxes on gambling ect...
The aim of these taxes are to internalise the externality. This graph shows taxes taxes implemented on pollution
When done correctly they will negate the externality
incentives companies to reduce pollution
form of revenue for the government
isn't effective if demand is price inelastic
hard to approximate how much the externality is therefore how much the tax should be
Subsidies might be provided so produces can producing a neificial good at a lower cost
A subsidy aims to increase the supply of a product that has external benefits
reduces cost enabling producers to reduce cost causing an increase of demand
incentive for people to increase consumption
cost to the taxpayer of providing subsidies
isn't effective if demand is price inelastic
hard to approximate how much the externality is therefore how much the subsidy should be
Subsidy
- government grants to businesses that reduce production costs causing a rightwards shift in the supply curve
Maximum price
- is a price set, usually by the government, that's prevents firms from charging over a certain price for a product
The max price line is below the equilibrium. This results in a shortage of JK
helps families of low incomes to afford products
help to prevent inflation
may cause a black market because of a shortage
will cause a shortage of goods
producers may leave the market
if government use subsidy to help them make the good, this would be very expensive
This shortage then results in the supplier restricting supply and possibly dropping out of the market causing supply to fall even further
Minimum price
- is a price set, usually by the government, that is garnetted to the producer
if the minimum price is too high, there will be a surplus every year
the government has to buy all the surplus (expensive)
this scheme involves a lot of storage which might burden the taxpayer
this encourages over-production which could cause inefficient allocation of resources
producer knows minimum they will receive per kilo (stability)
this certainty allows producers to plan investment and output
If the government sets a minimum guaranteed price (MGP) then the producer knows that the will receive at least that much per kilo no matter how much they produce
All the surplus will be bought by the government
This can result in an increase in supply and the firms already in the market supply mor and some firms may either because they are guaranteed a certain amount from the government
This minimum price line will result in a surplus of LM. The government will this surplus and store it until the price rises again where they can sell it for a profit.
Government may implement buffer stock scheme may be implemented if the prices are volatile
Here the government would buy when the price drops below p1 and then sell the stock when the price rises above p2. This can be quite effective
This would work very well with houses. Houses are non-perishable. This means they can get the full value for the houses when the sell them and they can rent them in they meantime
Government failure
Causes of government failure
Distortion of price signals
- min and max prices can mess up the signalling in the price mechanism. results in worse allocation of resources
Unintended consequences
- an unseen outcome that is worse than the intended benefit, such as increase in tax causes black market
Excessive administration costs
- can occur when the costs of administering somethings outways the benefit of what is being administered
Information gaps
- when a government intervenes in a market where they don't have all the information, they could cause a negative effect
Government failure
- is when a government intervenes and creates a net welfare loss
Roles of the price mechanism
rationing (allocation of goods)
signaling (whether to chance price)
incentive
Government intervention will almost always affect one or more of the price mechanism roles