Government Intervention: Direct Provision, Regulation & Nudges (DP IB Economics)

Explanation

Advantages

Disadvantages

• Public goods are beneficial for society and are not provided by private firms due to the free rider problem
   

• Examples include roads, parks, lighthouses, national defence

• They are usually provided free at the point of consumption
   

• Accessible to everyone regardless of income
   

• Usually provide both private and external benefits to society

• Paid for through general taxation
   

• There is an opportunity cost associated with their provision
   

• Products which are free may result in excess demand and long waiting times e.g. procedures at Public hospitals

Explanation

Advantages

Disadvantages

• Governments create rules (laws) to limit harm from the external costs of consumption/production
   

• They often create regulatory agencies to monitor that the rules are not broken

• Individuals or firms may be fined/imprisoned for breaking the rules e.g. selling cigarettes to minors is a punishable offence
   

• They help to reduce the external costs of demerit goods

• Fines can generate extra government revenue

• Enforcing laws requires the government to hire more people to work for the regulatory agencies
   

• Enforcing laws can be difficult as it is a complex process to determine if firms/consumers are breaking the laws
   

• The regulation may create underground (illegal) markets which could generate even higher external costs on society

Method

Explanation

Example

Provision of Information

• Governments can provide information to consumers in a clear and accessible manner to help them make more informed choices

• This may include labelling products with nutritional information, energy efficiency ratings, or environmental impact labels

Default Options

• Default options are pre-selected choices that people tend to stick with if they don't actively make a different choice  

• The UK Driving License Agency sets organ donation as the default option unless individuals explicitly opt out
   

• This nudges individuals towards donation without infringing on their autonomy

Framing and Presentation

• Governments may use framing techniques to highlight the positive aspects or consequences of certain choices

• Governments often run public health campaigns promoting the consumption of fruits and vegetables by framing them as essential for maintaining a healthy lifestyle
  

• Cigarette packages in many countries are required to display graphic warning labels that highlight the health risks associated with smoking, aiming to deter individuals from starting or continuing the habit

Incentives and Disincentives

• Governments can use incentives and disincentives to encourage or discourage specific behaviours

• France offers subsidies for purchasing electric vehicles and  imposes very high taxes on polluting diesel vehicles

Social Norms & Peer Influence

• People's behaviour is often influenced by social norms and the behaviour of others
  

• Public campaigns that showcase positive role models or highlight the majority engaging in socially responsible actions can nudge individuals towards similar behaviour

• On the Singapore Mass Rapid Transit system, users are encouraged to report MRT rule violations, such as littering or eating on trains
  

•  These campaigns often feature messaging that appeals to individuals' desire to conform to social norms and contribute to a cleaner community.

Feedback and Reminders

• Governments can implement strategies such as energy usage reports to help individuals understand and reduce their energy consumption
   

• Governments may also send letters to encourage preventive healthcare

• Electricity bills in Singapore include a chart which shows customers what the 'normal' usage is in their block of flats
   

• This encourages households to reduce their electricity consumption to match that of their housing peers