<2.7.1 REASONS FOR GOV'T INTERVENTION>

"Why does the government intervene?"

--THINK AHEAD--

"Why do you think the government regularly taxes cigarettes, alcohol, and driving?", "Do you think they seriously want to reduce consumption?", "Why not just ban it forever?"

--EARN GOVERNMENT REVENUE--

When the government places an INDIRECT TAX (GST) on a good, it receives a % of the selling price every time one unit is sold. The gov’t usually taxes goods with INELASTIC DEMAND such as CIGARETTES as when the price rises the quantity demanded will not fall very much meaning overall they can earn a higher amount of tax revenue.

--THINK AHEAD--

"Do you think it's a wise-move to encourage the return of mass car-manufacturing to the US?", "Do you think the UK should provide subsidies to help develop UK AI-firms?", "If so how can they help protect them from early foreign adopters?"

--SUPPORT DOMESTIC FIRMS--

The gov’t may wish to establish a new industry which will earn it a lot of GDP eg. Cloud-computing, or which will have a positive impact on its environment eg. renewable energy, therefore it can offer SUBSIDIES to domestic start-up firms, to enable them to compete against the already established companies, or to cover the initial high costs of R&D. Or if it wishes to protect domestic from foreign competition it can put TARIFFS (import taxes), and/or QUOTAS on imports.

--THINK AHEAD--

"In a market economy, income is derived from owning income-generating factors of production, and the answer to the 'for whom to produce?' question is 'those consumers willing and able to pay', so how can people who own 'unproductive' factors ever be able to meet their basic needs?", "Do you think education is a human-right?", "If education was solely provided by the private sector, how would low-income people ever have a chance to improve their human capital?"

"Look how many government/subsidised schools are close by!!"

--SUPPORT LOW-INCOME HOUSEHOLDS--

The gov’t may wish to support low-income households by offering SUBSIDISED services such as bus passes, or by DIRECTLY PROVIDING free merit goods such as education and healthcare. In addition, they can put MAXIMUM PRICES on important staple foods such as bread and milk as well as give welfare payments such as unemployment and housing benefits.

--THINK AHEAD--

"Why did President Trump put protective tariffs on China?"

--PROTECT DOMESTIC PRODUCTION--

TARIFFS on imports are aimed at making them uncompetitive compared to domestic production, thus increasing domestic production and employment.

--THINK AHEAD--

"Does having ?", "Do you think the UK should provide subsidies to help develop UK AI-firms?", "If so how can they help protect them from early foreign adopters?"

--INFLUENCE CONSUMPTION--

If the government wishes consumers to consume more goods which they deem beneficial to them and society, but which are under-provided by the market system such as education and healthcare, they can subsidise provision so it is cheaper or free to access, similarly if they wish to reduce consumption of goods which they deem non-beneficial to society but which are over-provided by the market system eg. cars and cigarettes they can tax them to reduce consumption.

--THINK AHEAD--

"Do you think it's a wise-move to encourage the return of mass car-manufacturing to the US?", "Do you think the UK should provide subsidies to help develop UK AI-firms?", "If so how can they help protect them from early foreign adopters?"

--CORRECT MARKET FAILURE--

As mentioned, the government uses taxes and subsidies to impact production levels as they believe the market has not delivered the optimal level for society, hence the market has ‘failed’ to achieve allocative efficiency and therefore they need to intervene to correct its failings.

--THINK AHEAD--

"Do you think it's a wise-move to encourage the return of mass car-manufacturing to the US?", "Do you think the UK should provide subsidies to help develop UK AI-firms?", "If so how can they help protect them from early foreign adopters?"

--PROMOTE EQUITY--

Left to the free-market those with productive in-demand resources earn more income than others and therefore can buy more goods and services and enjoy a greater standard of living. As such the market system results in a lot of income inequality, so the government tries to promote equity by redistributing income, by collecting taxes and using it to provide welfare payments, subsidies etc to low-income earners.

--TASK TIME!--

Find REAL WORLD EXAMPLES of gov’t interventions used to achieve EACH of these reasons. (MUST include, tax, subsidy, price controls, government regulation, and nudge) Paste the links to the article in this google sheet LINK_01

RWE: 'PRICE CEILING' LINK