1.2.6 Government intervention
a) Government policies to deal with externalities:
Taxation - Governments may impose monetary charges on harmful goods or services which make them more expensive to produce or consume.
Subsidies - Financial support may be provided for the production of goods and services which create positive externalities.
Fines - Financial penalties can be placed on businesses which violate regulation or cause significant negative externalities.
Regulation - Rules or restrictions are implemented to control or prevent negative externalities.
Pollution permits - Permits which allow businesses to pollute are issued. They are tradable which means they can be bought and sold between businesses.
b) Advantages and disadvantages
Taxation
Advantages:
Promotes the reduction of the production of negative externalities.
Generates government revenue .
Disadvantages:
Increased costs for consumers.
Difficult to measure the amount of tax which should be applied.
Subsidies
Advantages:
Increases supply of goods and services which causes positive externalities.
Decreases costs for businesses and prices for consumers.
Disadvantages:
Causes strain on government budget.
May cause issues if misused or misallocated.
Fines
Advantages:
Prevents the production or use of harmful goods and services.
Generates government revenue.
Disadvantages:
Difficult and costly to enforce.
May not be enough to deter large firms if fines are too low.
Regulation
Advantages:
Prevents harmful activities.
Provides clear standards for businesses and consumers.
Disadvantages:
Difficult and costly to enforce.
Can prevent innovation if inflexible.
Pollution permits
Advantages:
Creates a financial incentive to reduce emissions.
Encourages innovation as firms seek cost-effective ways to pollute less.
Disadvantages:
Creates a financial incentive to reduce emissions.
Promotes innovation as firms seek cost-effective ways to reduce pollution.
c) Government regulation of competition
Government regulation of competition ensures that markets function fairly while protecting consumer interests and maintaining efficiency. The key aims include:
Promoting competition - Promotes innovation and efficiency by preventing unfair competition.
Limiting monopoly power - Prevents the excessive control of a single firm and ensures equal access to the market.
Protecting consumer interests - Protects customers from misleading practices, low-quality goods, and unfair pricing.
Controlling mergers and takeovers - Keeps the market from becoming overly concentrated, which may negatively impact competition.
d) Government intervention in the labour market
Reasons for minimum wage:
To protect workers against unduly low pay.
To reduce poverty by ensuring a basic income level.
Encourage productivity and fairness in labour markets.
Advantages of Minimum Wage:
Improves living standards for low-income workers.
Reduces income inequality.
Increases motivation and productivity.
Disadvantages of Minimum Wage:
May increase in unemployment if firms cannot afford higher wages.
Increased costs for businesses may lead to increased prices.
May discourage hiring unskilled or inexperienced workers.
Minimum wage diagram
Minimum wage - Shows how a wage floor can lead to excess supply of labour (unemployment).
Increased minimum wage - Highlights shifts in the labour supply and demand curves, affecting equilibrium.
