Government Interventions in Market Failures Quiz

Government Intervention in Markets

• Governments intervene to correct market failures and promote economic efficiency.
• Intervention aims to ensure equitable resource distribution, especially in cases where the market does not allocate resources effectively.

Characteristics of Price Instability

• Characteristics of price instability include frequent fluctuations, unpredictable changes, and volatility.
• Attributes such as steady price levels and predictability do not signify price instability.

Maximum Price Policy

• A maximum price policy is implemented to prevent prices from rising above a certain level, ensuring affordability for consumers.
• Commonly applied in essential goods markets to protect low-income individuals from price surges.

Missing Markets for Public Goods

• Government provision or funding is the policy used to address the lack of markets for public goods, ensuring their availability to all.
• Public goods, like street lighting and national defense, are typically underprovided by the private sector due to non-excludability.

Free-Rider Problem

• The free-rider problem arises when individuals benefit from resources they do not pay for, especially prevalent in public goods provision.
• This issue leads to underfunding and insufficient production of essential public services.

Government Buying and Selling Policy

• The policy involves governmental intervention in agricultural markets by purchasing surplus produce during high supply to stabilize prices.
• Government then sells this excess during low supply to manage market fluctuations and ensure food security.

Contracting Out Policy

• Contracting out involves the government outsourcing services to private entities to enhance efficiency and reduce costs.
• This policy aims to leverage private sector expertise for public service delivery.

Demerit Goods

• Demerit goods are items deemed socially undesirable, often linked to negative externalities (e.g., tobacco, alcohol).
• Categories that generally do not qualify might include basic necessities or positive externality goods.

Lowering Consumption of Demerit Goods

• Policies to reduce the consumption of demerit goods focus on mitigating health and social problems caused by their use.
• These may include taxes, regulations, and public awareness campaigns.

Minimum Price Purpose

• A minimum price policy sets a price floor to ensure producers receive a fair income, particularly in volatile markets like agriculture.
• This aims to protect producers from market price drops.

Disadvantage of Minimum Price Support

• A main disadvantage includes the potential overproduction, leading to excess supply that the government may struggle to manage.
• It can create inefficiencies and drain government resources.

Guaranteed Minimum Price Purpose

• The purpose of a guaranteed minimum price is to provide price stability and income security for producers.
• This strategy helps to encourage consistent production levels in agriculture and other sectors.