1.4 Flashcards
Taxation can be used to
alter the level of demand, bring in revenues, meet social optimum levels of putout and therefore improve market welfare.
Evaluate taxation
setting correct tax rate, cost of collection and admin, elasticity of demand, could reduce DE for businesses.
Idea of subsidies
Alter level of demand, and meet social optimum levels while also allowing for more funds to DE and therefore improve innovation and efficiency.
Evaluate subsidies
But - setting right subsidy rate, no guarantee of reinvestment, may payback shareholders, opportunity cost, time period.
Idea of minimum price
Idea is contract consumption of demerit good, internalising externality and reach AE.
Evaluate minimum price
price inelastic demand, set at the right level - based on perfect info assumption which is unrealistic, black markets form, regressive on poorer bruddas.
Maximum price idea
Price below normal price, more consumption - merit goods?
Evaluate maximum price
shortage in supply, which is government failure - may lead to black market. Enforcement of the min price is expensive, setting the min price at the right level, cost - may subsidise companies to reduce the shortage.
Provision of information
Health warnings, nutritional labelling, gamble and drink aware, industry standards on information all to reduce the asymmetry of info in the market
Regulation to correct externalities - other
- Smoking bans
- Minimum age
- Max co2 emissions
- Speed limits
Evaluate government intervention
- Value judgements from politicians
- Level of info
- Opportunity costs
- Political reputation
- Law of UC - gov failure
- Regulatory capture
Define government failure
When government intervention in markets leads to less efficient allocation of resources and makes situation worse, leading to a net social welfare loss
Types of gov failure
- distortion of price signals
- unintended consequences
- excessive admin costs
- info gaps
- regulatory capture
Distortion of price signals
subsidies could distort price signals by distorting free market mechanism, so could lead to the inefficient allocation of resources because price mechanism not able to act freely
Unintended consequences
Popularised by American Robert Merton - states that government intervention tends to have unexpected outcomes of a purposeful action, adding more costs than benefits.
