1.4 government intervention

tax and subsidies, minimum and maximum price, buffer stock, tradable pollution permits, state provision of public goods, provision of information, regulation

reduces supply, reduces demand, fixes externalities, increases government revenue

doesn’t work for inelastic products, targets low income tax, difficult to calculate value of tax, decreases international competitiveness

increases social welfare, benefits low income groups

funding creates opportunity cost, encourages inefficiency - decreases competitiveness, doesn’t work on inelastic products, difficult to calculate value of subsidy

increases producer revenue, encourages production of essentials (increases producer surplus), discourages consumption of demerit goods (decreases consumer surplus)

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

allows essentials to be affordable (increases consumer surplus), stops monopolies of individual firms exploiting customers, encourages consumption of merit goods

less incentive to supply (decreases producer surplus), leads to emergence of black markets during shortage

prevents poor producers falling into absolute poverty, stabilising prices can encourage investment, stabilises volatile prices

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

provides powerful incentive, revenue from scheme can be used to fund green projects

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 intervention that results in a net welfare loss

distortion of price signals, unintended consequences, excessive administrative costs, information gaps

supply and demand can be distorted, resulting in keeping inefficient firms in business, consumers charged too much/too little etc

policy has wrong effects e.g black markets, increased inequality

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