1.3 Government Intervention Flashcards
What is government intervention?
The market equilibrium is not optimal so they intervene.
What are the government intervention methods?
Indirect Taxes
Regulations
Informations
Subsidies
Max and Min prices.
What is an indirect tax?
An extra price on production passed onto consumer as price of consumption.
What is ABCD of indirect taxes?
^ tax
v production
^ price
v Qd
What is the top shaded area on an indirect tax graph?
Consumer tax burden.
What is the bottom shaded area on an indirect tax graph?
Firm tax burden.
What moves on the indirect tax graph.
Supply moves from S1 to S2 (moves left)
Why can an indirect tax be ineffective?
When price is inelastic e.g. addictive goods.
What are the negatives of indirect tax?
Tax leads to an increase in price which could lead to inflation and fall in real income.
What are the positives of indirect tax?
More money for movement to spend
Stop people from buying bad products.
What are subsidies?
a sum of money from government to decrease cost of production to create a decrease in price to increase quantity demanded.
What moves in a subsidy graph?
S1 to S2 (where S2 is further right) = opposite to indirect tax.
What does the shaded area represent in a subsidy graph?
Cost of subsidy to government.
What is the ABCD of subsidy.
^ subsidy v cost of production v price ^quantity demanded.
Positives of Subsidy
Qd increases
Less costs = more production revenue
Less price = less inflation
Negatives of subsidy
Cost to government = financial and opportunity cost
Consumers might not respond
price inelastic demand.
What is a regulation?
Making a product a necessity or banning it completely.
What happens if you make a product a necessity?
Increase in Qd then increase in price.
What happens to the graph with a necessity?
Demand increase (moves to right)
What happens if you introduce an age limit?
Qd is decreased.
What happens to graph if age limit is introduced?
Demand decreases (moves to left)
What are examples of supply regulations?
Environmental regulations
Health and safety
What will environmental regulations shift in the graph?
Supply increases from S1 to S2 (left)
What will limiting production regulations do to the graph?
Decrease supply from S1 to S2 (right)
