1.4 Flashcards
What are some examples of market not working properly and fail to provide people of what they need?
Healthcare and education might not be available if left to free market.
- Governments step into fix and make sure these services are available
What is an Indirect tax?
A tax on goods and services that people buy. Like cigarettes and petrol:
- These raise the cost of production for businesses
- Make products more expensive for consumers so they might buy less
When do governments use indirect tax?
Discourage people from buying demerit goods like cigarettes.
What are the two type of indirect taxes?
Ad valorem and specific taxes
What are Ad valorem taxes?
Percentage tax on the price of a product like VAT
Who pays Ad valorem Taxes?
Producers can pass the tax onto consumers by raising the price or might pay the taxes themselves if they think this will prevent people buying their product
When do we call demand price inelastic?
If demand for a product doesn’t change even when the price changes for example cigarettes. Consumers will pay the tax
Whats a specific tax?
A fixed amount of tax per unit. Similar to valorem tax. Consumers pay more when demand is inelastic
Why do governments use indirect taxes?
To reduce consumption on harmful goods. Discourages people to buy goods.
- To reduce external costs . Polluters pay for the damage
What is a subsidy?
A financial boost from government to help producers
- Lowers production costs so businesses can produce more
- encourages people to buy goods that are good for society
What is maximum price?
The government might set a maximum price where consumption or production is good to be encouraged. So good not become expensive to produce
Advantages of maximum price?
- Prevent monopolies exploiting consumers. EU price caps roaming charges to make sure not too expensive for people to use phones abroad.
- Control market price
- Lead to welfare gains for consumers keeping prices low. Also increase efficiency since they keep costs low.
What is minimum price?
- Government set a minimum price where the consumption or production of a good is to be discouraged.This is so the good never falls below a certain price.
Example of minimum price?
Might set it on alcohol so it is less affordable to buy. Minimum prices would reduce negative externalities from consuming a demerit good such as alcohol.
How are minimum prices set?
- Above the free market otherwise they would be ineffective.
Explain Tradeable pollution permits?
- Could limit negative externalities in the form of pollution. Firms would only be allowed to pollute a certain amount. For example a limit on how many co2 emissions are released from steel industry.
Advantages of Tradeable Pollution permits?
- benefit economy in the long run by encouraging firms to use green production
- Raise revenue from permits as they can sell to firms. Also makes people invest in permits as they need more
Disadvantages of Tradeable pollution permits?
- Lead to firms relocating to cities without pollution limits and reduce production costs.
- Might pass higher production costs to consumer
- Could be expensive for governments to monitor emissions.
What is State provision of public goods?
- Government could provide public goods which are unprovided in free market. (healthcare and education)
- Makes merit goods more accessible which increases consumption.
- Could be expensive for governments to provide education and the government will incur an opportunity cost.
Explain provision of information?
- By providing information the government can insure there is no information failure so consumers can make more informed decisions.
- Government make it illegal for second hand car users to not say all information
Explain Regulation?
- Government uses laws to ban consumers consuming a good.
- E.g minimum school age is 16 and education or training until 18. Has positive externalities on higher skilled workforce.
- Firms which fail to follow regulations will get fines which act as a disincentive to break rule. Also raise costs of firms.
What is government failure?
- When they intervene in markets. They could worsen the market failure already present. This results in net welfare loss to society
What are the causes of government failure?
- Distortion of price signals
- Unintended Consequences
- Excessive admin costs
- Information gaps
Explain Distortion of price signals?
- Gov could distort price signals by distorting the free market mechanisms. Could lead to government failure. Could be an inefficient allocation of resources as market mechanisms cannot act freely
Explain unintended consequences?
- Actions of producers and consumers are unexpected or unintended.
- Consumers act in unexpected ways.
Explain excessive admin costs?
- Social benefit of policy might not be worth the financial cost of administrating the policy. Might cost more than government intended. Has to see if it is a good value for money
Explain information gaps?
- Some policies are determined without perfect information. Requires a cost benefit analysis and is time consuming and expensive. Hard for government to gain every bit of information so assumptions are made.
