Government Intervention in Pricing

-Higher price –> less supplied and consumed of demerit goods. Increase in consumer welfare. -Government gains revenue.
-Tax receipts can be used to further help with problem e.g. Taxing alcoholic drinks and using the receipts to add funding to the NHS or policing. Disadvantages:

-If demand is very income inelastic (e.g. cigarettes) then consumption would not greatly reduce-> potential for black market. If consumption does remain the same then taxation is just a way for the government to basically, take people’s money. -Leads to inflationary pressure

-Hard to decide the level of taxation as Impossible to work out exact value of negative externalities. -In the case of pollution it is particularly hard as there would have to be an agreement with other countries about what to do with the tax money. (If the UK gov. receives money from pollution permits, should some of this money go to other countries who suffer from the affects of British pollution? -Some taxes simply make things less equitable e.g. Introducing a fat tax would just make it harder for poorer people to afford food.

SUBSIDIES RATING 7/10
advantages:
-prices fall so the demand and consumption of merit goods/positive externalities will increase = increase in economic welfare – can make things more equitable e.g. Subsidising healthy foods would make lower prices for the poorest in society. Disadvantages:

-expensive for the Government (opportunity cost?)
– correct level of subsidy is difficult to gauge – positive externalities are hard to calculate
– may encourage inefficiency
– depends on the PED of the product as to the effectiveness

BUFFER STOCKS RATING 4/10 advantages:
– Stable prices help maintain producers incomes
– Stable prices prevent excess prices for consumers
– Food supplies are assured

disadvantages:
In agriculture more likely the government will have to buy than sell- very costly to government as extra supply will have to be stored –> milk lakes etc. e.g. In 1995 CAP was 58 % of the EU budget. Some goods cannot be placed on buffer stocks e.g. A perishable good like milk. (and most commodities will perish eventually) Regulatory capture- buffer stocks like the CAP favour farmers over consumers; consumers have to pay more to subsidise for the welfare of farmers. Increases inequality as poorer have to pay a higher percentage of their income on food. If combined with a minimum price this encourages inefficiency. Government failure when the government doesn’t have enough information to decide the appropriate price for the buffer stock to maintain. If it is set at the wrong price this can harm consumers/producer welfare.

MINIMUM PRICE RATING 6/10
advantages:
-Reduces consumption of a demerit good e.g. Alcohol.
disadvantages:
excess supply common; leads to butter mountains and milk lakes –> costly to keep stock. can be fairly hard to enforce completely effectively. E.g. Shop owners might get around the minimum price with 2 for 1 offers.

MAXIMUM PRICE RATING 7/10
advantages:
-increases consumption of a merit good e.g. Education or healthy food. -Can help to reduce monopoly power and ensure monopolies can’t exploit consumers with extremely high prices and restricted output. disadvantages:

Reduces availability of supply and increases quantity demanded meaning there is excess demand i.e. More people will want the merit good but they won’t be able to purchase it. So the maximum price fails.

Correcting information failures RATING 9/10
advantages:
-Labelling and health campaigns and education etc. make people more aware of the benefits/costs of buying a certain product, and remove a lot of the asymmetric information between producers and buyers. -Growing awareness of consumers of prices in the market encourages more competition disadvantages:

-Perfect information is still fairly difficult.

PROVISION OF PUBLIC GOODS 8/10
advantages:
-Provision of something that would be missing from the free market because of complete market failure. disadvantages:
-Deciding how to fund provision can be difficult. Progressive taxation or based on the benefits individuals receive from public goods?

REGULATION AND CONTROL OF MONOPOLY POWER
advantages:
-Removal of barriers to entry encourages competition and means monopolies cannot overcharge consumers -Maximum prices force monopolies not to charge high prices and restrict output. – Products are monitored to ensure they have a sufficient quality e.g. Train companies have fines or are removed if the trains are often late. – nationalising inefficient markets like railway can be beneficial to ensure natural economies of scale are taken advantage of. – the CC (competition commission) ensure no mergers take place that are against public interest. Disadvantages:

– When monopolies do take advantage of economies of scale on their own there is no need for nationalisation. – Competition isn’t always a good thing- if barriers of entry were removed from the bus industry then competition would mean bus services wouldn’t reach less profitable or less demanded places.