What is a mixed economy?
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What is a mixed economy?
A mixed economy is an economic system with varying degrees of government intervention alongside private enterprise. It has a public sector and a private sector.
Define market failure.
Market failure is a situation where there is a misallocation of resources when markets are left to the price mechanism with no government intervention.
What are the four common methods of government intervention in markets?
The four common methods of government intervention in markets are:
indirect taxation
use of subsidies
maximum prices
minimum prices.
What is an ad-valorem tax?
An ad-valorem tax is a tax based on the value of a good or service, imposed as a percentage, such as VAT in the UK.
How does a specific tax on negative externalities of production work?
A specific tax on negative externalities of production works by shifting the supply curve left, reducing output and increasing price to move closer to the socially optimal level.
What is the purpose of subsidies in government intervention?
Subsidies in government intervention are used to encourage production or consumption of merit goods, moving consumption closer to the socially optimal level.
Define maximum price.
A maximum price is a price ceiling, set by the government below the existing free market equilibrium price, which sellers cannot legally exceed.
What is the effect of a maximum price on supply and demand?
The effect of a maximum price on supply and demand is a contraction in quantity supplied and an extension in quantity demanded, creating excess demand or shortage.
What is a minimum price?
A minimum price is a price floor, set by the government above the existing free market equilibrium price, below which sellers cannot legally sell.
How do trade pollution permits work?
Trade pollution permits work by creating a market for pollution, where firms can buy or sell permits, incentivising investment in cleaner technology.
What are public goods?
Public goods are goods beneficial for society that are not provided by private firms due to the free-rider problem. They are usually provided free at the point of consumption.
True or false?
Regulation is a method of government intervention
True.
Regulation is a method of government intervention.
Define government failure.
Government failure is when government intervention in a market to correct market failure results in a net welfare loss to society.
What are the four main causes of government failure?
The four main causes of government failure are:
distortion of price signals
unintended consequences
excessive administrative costs
information gaps.
How can distortion of price signals lead to government failure?
Distortion of price signals can lead to government failure by artificially altering the signalling function of the price mechanism, potentially resulting in inefficient resource allocation.
What are unintended consequences in the context of government failure?
Unintended consequences in the context of government failure are unexpected outcomes of government intervention, often resulting from producers and consumers seeking to maximise their self-interest.
True or false?
Excessive administrative costs can contribute to government failure
True.
Excessive administrative costs can contribute to government failure.
How do information gaps contribute to government failure?
Information gaps contribute to government failure because decision makers do not have perfect information and are subject to political pressure, leading to sub-optimal decisions.
What is regulatory failure?
Regulatory failure is a type of government failure where regulatory agencies fail to effectively enforce rules or regulations.
Define illegal markets in the context of government failure.
Illegal markets in the context of government failure are unauthorised markets that emerge as an unintended consequence of government intervention.
What is an example of regulatory failure in the UK energy market?
An example of regulatory failure in the UK energy market is Ofgem's 53% increase in maximum energy prices in 2022, leading to affordability issues for consumers.
True or false?
The smoking ban in the UK had no unintended consequences.
False.
The smoking ban in the UK had several unintended consequences, including increased congestion around doorways and increased cigarette stump littering.
What is an example of a poorly executed policy due to information gaps?
An example of a badly executed policy due to information gaps is the NHS National IT Program, which was abandoned in 2013 after costing over £10bn without meeting its objectives.
How can excessive administrative costs lead to government failure?
Excessive administrative costs can lead to government failure when the costs of regulation or administration are greater than the savings in social welfare.