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level: Examples of Government Failure

Questions and Answers List

level questions: Examples of Government Failure

QuestionAnswer
What was the Common Agricultural Policy (CAP) Purpose?-Its main aim was to Correct Market Failure that was due to Volatile, Fluctuating Prices for Agricultural Products -Correcting them allowed a Reasonable, Stable Income for Farmers
How did the CAP try to Achieve their Aim?-Direct Payments to Farmers to Support their Incomes -Import Restrictions on Goods outside the EU - Tariffs on Imported Goods -Subsidies and Buffer Stocks -All Aimed at Stabilising Prices, and Farmers Incomes
What Problems erupted from the CAP?-A Minimum Price encouraged Greater Output, which led to environmental damages as Farmers embarked on Intensive Farmer's Methods + Chemical Fertilisers -Oversupply of Agricultural Products meant Governments had to Buy and Store - Opportunity Cost? Stocks were sold at Low Prices outside the EU, affecting Farmers outside the EU who couldn't Compete with such Prices -Large Waste Foods Products, as they are Perishable -Increased Food Prices hurt the Poorest in Society, who had spent a Large % on Food. The Welfare Gain to Farmers was Less than Welfare Loss to Consumers -Cost to the Taxpayer for Getting Rid of Excess Agricultural Products. The EU was essentially making a Huge Loss -CAP led to Distorting in Agricultural Markets, Oversupply and a Net Welfare Loss to Society
What would a Maximum Rent do on a Demand Supply Diagram?-The Idea would be that Maximum Rent would lead to Rent Price Falling and the Demand for Rental Properties to Expand and Supply to Contract -A Shortage thus would Occur, as an Excess of Demand Exists.
What are the Problems from Imposing Maximum Rents?-Excess Demand leads to a Shortage of Available Properties and Encourages a Black Market to Develop. This would infer Higher Prices, making the Policy quite Useless. Furthermore, Landlords on the Black Market may offer not as good of a Service -Shortage of Rental Properties impacts the Supply of Workers. Workers may be Unable to find somewhere Near their Place of Work to Rent, affecting Firms to Hire and Attract Staff
How effective would Subsidies be when given to Public Transport?-The Purpose of the Subsidy is to Reduce Car Usage + Pollution Levels -Subsidies don't always Equal Increases in Passengers, as Bus and Rail Transport may be seen as Inferior Goods. Furthermore Travelling by Car may be Easier and Private -Allocation of Resources to Public Transport Sectors which doesn't Increase their Usage (And therefore Decrease in Pollution) can be seen as a Net Welfare Loss
How does the Road Congestion Scheme work?-A Method of Reducing External Costs, linked to Road Congestion and Pollution, and is also called Road Pricing -They Charge Users to Travel on the Road where Congestion is a Problem -The Charge would be set to reach the Socially Optimal Level of Traffic.
What limits the Effectiveness of the Road Congestion Scheme-Price set too Low leads to a Limited Impact on Traffic Levels -Prices set too High lead to Little Cars being covered by the Charge. This can Decrease Trade for Firms within the Congestion Charge Area, Under-Utilisation of the Road, and cause Congestion in other Areas -May also Impact the Poorest in Society, and put them off using Cars in the Future
Why did the EU introduce Fishing Quotas?-The Aim was to Ensure Fish Stocks are Stable in European Waters. To Prevent Overfishing by putting Limits on Amount of Fish that can be Caught
Why did the Fishing Quotas have Problems? -What did this lead to in terms of Reform?-Stocks of Some Species are Depleting even with the Quota, which may signify that it is too High -Fishing Boats that Exceed the Quotas will throw Dead Fish back into the Sea, known as Discards. This is Wasteful -Poor Monitoring of Fish Catching, so may be Hard to Enforce the Quota -This led to some Need to Reform. One Change may be called the Landing Obligation which essentially means that Everything Fishermen catch must Stay on Board to Prevent Discards. This is quite a Huge Task though