What is it? Laws, rules and watchdog bodies imposed by the Government on markets Real Life Examples Smoking in public places ban 18 to buy alcohol

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2 What is it? Laws, rules and watchdog bodies imposed by the Government on markets Real Life Examples Smoking in public places ban 18 to buy alcohol Competition Commission to regulate/break up monopoly markets Regulators such as Ofcom oversee the behaviour of set industries Financial cost opportunity cost Red tape stifles business competitiveness Risk of Government Failure Administration and enforcement costs Regulatory capture acting in interests of industry over consumer Policy Myopia short termism

3 What is it? The Government provides goods/services where the free market does not Real Life Examples National rail Royal Mail NHS Prescription medication for low income groups Education Street lights Flood defence National defence Funded through taxation in this country we have a progressive tax system which means you pay more as you earn more questions of fairness and the finance used to fund provision carries an opportunity cost High costs means high taxes which are a disincentive to work Free rider problem non tax payers enjoy benefits Risk of Government Failure Disincentive effect cost of provision means tax Political self interest decisions based on re-election aspirations

4 What is it? A tax on spending Called indirect because we do not pay it directly to the government, we pay it to the shopkeeper in the first instance Advantages Can be used to influence QD on demerit goods to Internalise the external cost Tax avoidance Tax evasion Smuggling Development of grey markets Risk of Government Failure Law of unintended consequences Conflicting objectives tax revenue collection and crime reduction Grey Market aka underground or hidden economies Transactions which take place illegally to avoid taxation

5 Value added tax VAT standard rate 20% VAT domestic fuel rate 5% Excise duties Beer (pint) 26p Wine (75cl bottle) 116p Spirits (70cl bottle) 548p 20 cigarettes Specific duty 181p Ad valorem (22% of retail price) 87p Petrol (litre) 51p Unleaded petrol (litre) 49p Diesel (litre) 49p Air passenger duty Low rate (for destinations within the EU) 10 High rate (for destinations outside the EU) 20 Betting and gaming duty General betting duty (applies only to Off-course bookmakers) 6.75% Pool betting duty 17.5 Insurance premium tax Standard rate 5% Higher rate (for insurance sold accompanying certain goods and services) 17.5%

6 P max Free market Equilibrium Excess Demand S Price Ceiling Favourite Multi Choice: a Max price ABOVE the market price.will have NO IMPACT! D What is it? Maximum Price: a price ceiling above which the price of a good or service is not allowed to increase Real Life Examples Rent controls in major cities Calls for Banker s Bonus to be capped Advantages Hold P down gains in consumer welfare Creates a greater incentive for firms to control costs Leads to excess demand perhaps worsening market failure Only have an impact if set below market price Reduces firm s profits and thus incentives to expand May deter new entrants to the market Not an adequate substitute for competition Black markets develop

7 P min Free market Equilibrium S Price Floor What is it? Minimum Price: a price floor below which the price of a good or service is not allowed to decrease Real Life Examples Brazilian coffee producers Calls for minimum price for a unit of alcohol UK Minimum wage Excess Supply Favourite Multi Choice: a Min price BELOW the market price.will have NO IMPACT! D Advantages Hold P up protects the living standards of producers/the poorest members of society Helps to make the distribution of income and wealth fairer If product is price inelastic it increases revenue and thus creates greater scope for expansion and employment Removes the incentive for producers to control costs, leading to productive inefficiency (producers not working at bottom of ATC curve) Sends out false price signals, gives false impression of excess demand, but this is not real and leads to excess supply Only have an impact if set above market price Black markets develop

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9 Price D S Price = 0 S and D curves meet the X axis where P=0 NHS: in disequilibrium (excess demand) resulting in long waiting lists P=0 QS QD Rush Hour Traffic: again there is excess demand resulting in congestion Quantity

10 Price D S Rush Hour Traffic: again there is excess demand resulting in congestion P=Toll One solution is to increase the cost of certain route at certain times of the day/week through toll charges P=0 QS QD Quantity

11 P1 is the government s target price When Supply in the market increases to S2 the government will buy up Q2-Q1 to take Supply back to S1 and thus price back to P1 When Supply in the market falls to S3 the government will release stock of Q1-Q3 from it s stock pile to take supply back to S1 and thus price back to P1 The result (in theory) is PRICE STABILITY Used mainly in AGRICULTURAL MARKETS where supply is volatile as it is weather dependent An intervention system which aims to limit the fluctuations in the price of a commodity

12 Buffer Stock Real Life Example CAP: First established in 1962, the CAP aims at ensuring the free trade of farm products within the European Union, guaranteeing the prices of these products through buffer stock schemes, and maintaining protective tariffs against farm products from outside the EU. Critics of the CAP (Common Agricultural Policy) argue that it has operated too much in the interests of farmers, and against the long term interests of the consumer, environment and developing countries. This is an example of regulatory capture. The CAP means that European consumers pay prices determined by the least efficient European producers rather than world market conditions.

13 Advantages of a successful buffer stock scheme: Protect farmers incomes and standards of living Stability encourages capital investment in farming which increases productivity Farming has positive externalities and helps to maintain rural communities stable prices prevent excess prices for consumers helping consumer welfare Problems with buffer stock schemes: The opportunity cost of the government finance required to buy the excess supply A guarantee of being able to sell their produce may lead to over supply by farmers Requires a large about of start up capital Expensive to administer Setting the target price is a value judgement and many may disagree

14 What is it? Taxes which are paid directly to the tax man, applied to income and wealth Real Life Examples Income Tax 20% on first 35,000 40% on 35, ,000 50% on 150, % tax on 150k+ very controversial Counter-productive? Corporation Tax : paid by firms on their profits % % % Reducing to aid economic recovery Advantages Redistribute income and wealth reduce inequality Generate tax revenues which are necessary to fund subsidies, direct provision etc. Development of grey markets tax avoidance Consumers: Disincentive to work for consumers The unemployment trap where people are as well off, or better, by not working than by working due to the withdrawal of benefits and taxes imposed Firms: Disincentive to expand for firms Limit scope for profit reinvestment for firms High rates send wealth creators overseas

15 What is it? Amounts that can be deducted from a persons annual income to reduce the amount on which tax is paid Examples Financial backers of new start-up businesses receive tax relief as an incentive Membership of unions/professional bodies Gift Aid Advantages Can be used to encourage people to behave in certain ways e.g. invest in start-up businesses Able to target it to certain segments of society Requires clarity of information threatened by imperfect information Reduces tax revenues for government

16 What is it? The provision of a wide range of social services, for the benefit of individual citizens Examples Job Seekers Allowance Disability Benefit Child Benefit Advantages Redistribute income and wealth more fairly Ensure basic living standards for all Opportunity cost of government finance Voluntary unemployment where people choose to be unemployed Unemployment trap people are better off not working so do not Fair on those who work/pay? Welfare state generations of families that have never worked

17 What is it? Improving information so the over/under consumption of demerit/merit goods can be controlled. Aims to improve the understanding of the true cost/benefits of consumption. Real Life Examples Anti smoking/drinking campaigns Eat 5 a day Flu jab advertisements Advantages Enables people to make their own decisions Can target at specific market segments Long lasting cultural shifts passed down in generations Long time lag Expensive Very difficult to change well established behaviours consumer inertia Demerit goods are addictive Effectiveness depends on the nature of the product

18 What is it? These is a permit sold to firms by the government allowing them to pollute up to a certain limit. These can be bought and sold between firms. Exceeding your legal limit will result in huge fines. Advantages The government can cap the total emissions allowed within a time period by limiting permissions sold The firm s which cause the most emissions pay the most Gives firms an incentive to reduce emissions Generate revenue which can be used to further R&D into sustainable energy intergenerational equity (fairness) Uses market forces to limit emissions rather than regulation The system must be enforced to be effective Requires teams of factory inspectors Careful thought is required regarding the fines imposed if limits are exceeded

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