Government Controls (Edexcel IGCSE Economics)
Exam board Pearson Edexcel · IGCSEUpdated 2024-06-24
Government Controls and Macroeconomic Objectives
Spec point —
2.1.2d
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Government controls are used to correct market failure, ensuring that markets work more efficiently, which creates greater economic welfare for consumers and firms
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In the short term, government controls such as regulation, legislation, fines and pollution permits may negatively impact some macroeconomic objectives
- E.g. Government controls on levels of emissions increase costs for firms in the short run, reducing investment and therefore slowing down economic growth. However, in the long run, there is an incentive to transition towards cleaner energy sources and protect the environment
Percentage of people saying protecting the environment should be given priority
Source:Statista
Graph analysis
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A 2019 survey revealed that across EU countries, prioritising environmental protection is important to consumers, even if it slows economic growth
- Romania had the strongest opinion, with 87% of respondents wanting environmental protection over economic growth
- With the lowest score of 51%, over half of the Netherlands still expressed a belief that environmental protection should be a priority
Impact of government controls on macroeconomic objectives
| Macroeconomic Objective | Impact |
|---|---|
| Economic growth | - Environmental regulations, legislation, permits, and fines impose costs and affect the ease of doing business - This leads to decreased levels of output and may lead to a slowdown in economic growth - E.g. In 2023, Anglian Water of the UK was fined £2.65 million for violating environmental permits in the North Sea, increasing their costs |
| Low and stable inflation | - While pollution permits, fines, and regulation raises costs of production, this can lead lead to cost-push inflation |
| Low unemployment | - Government controls to protect the environment may indirectly increase unemployment in some industries (such as coal powered plants) by causing redundant workers - On the other hand, they can drive innovation and create employment opportunities in green industries |
| Stable current account on balance of payments | - Higher cost exports may be less desirable abroad, causing exports to fall - Domestic output becomes more expensive than equivalent imports, leading to more imports and a worsening of the current account |
| Environmental protection | - Negative externalities associated with pollution and resource depletion is reduced and overall sustainability is improved |
| The redistribution of income | - Government controls may lead to higher costs, which disproportionately impacts lower income earners e.g. a tax on car emissions - However, as industrial pollution tends to be concentrated in low-income and industrial areas, it aims to protect worse off in society |
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