types of government intervention
tax and subsidies, minimum and maximum price, buffer stock, tradable pollution permits, state provision of public goods, provision of information, regulation
advantages of tax
reduces supply, reduces demand, fixes externalities, increases government revenue
disadvantages of tax
doesn’t work for inelastic products, targets low income tax, difficult to calculate value of tax, decreases international competitiveness
advantages of subsidy
increases social welfare, benefits low income groups
disadvantages of subsidy
funding creates opportunity cost, encourages inefficiency - decreases competitiveness, doesn’t work on inelastic products, difficult to calculate value of subsidy
advantages of minimum price
increases producer revenue, encourages production of essentials (increases producer surplus), discourages consumption of demerit goods (decreases consumer surplus)
disadvantages of minimum price
reduces disposable income, encourages inefficiency and over-production (dead weight loss) - reduces competitiveness, encourages consumption of harmful goods, encourages black markets (decreases consumer surplus), targets low income households, opportunity cost - government may have to purchase excess supply
advantages of maximum price
allows essentials to be affordable (increases consumer surplus), stops monopolies of individual firms exploiting customers, encourages consumption of merit goods
disadvantages of maximum price
less incentive to supply (decreases producer surplus), leads to emergence of black markets during shortage
advantages of buffer stock
prevents poor producers falling into absolute poverty, stabilising prices can encourage investment, stabilises volatile prices
disadvantages of buffer stock
requires lots of capital, land and labour, if prices are too high demand could fall, restricts exports, free rider problem, consumers may turn to harmful substitutes, encourages black markets
if max and min are set too high or low, demand could be too high or low
advantages of tradable pollution permits
provides powerful incentive, revenue from scheme can be used to fund green projects
disadvantages of tradable pollution permits
easy to stockpile during low price times, difficult to measure value of pollution, unintended consequences - prices passed on to consumers, if permit prices are too low incentive stops
government failure
government intervention that results in a net welfare loss
causes of government failure
distortion of price signals, unintended consequences, excessive administrative costs, information gaps
distortion of price signals
supply and demand can be distorted, resulting in keeping inefficient firms in business, consumers charged too much/too little etc
unintended consequences
policy has wrong effects e.g black markets, increased inequality
examples of govt failure
EU’s CO2 quota increased production of diesel cars
NHS providing e-cigarette subscriptions information gap as consequences of vaping is unknown, people start vaping when they weren’t smoking beforehand