1.4 Flashcards
What are the two indirect taxes?
Specific tax and ad valorem tax
What is a specific Tax?
A tax which is a fixed amount for each good or service sold. For example 10p for every 100g of sugary drinks,
What is an Ad valorem tax?
A tax imposed on an item based on its value. e.g VAT
What are advantages of Indirect Taxes?
1- Source of revenue for the government
2- Reduce external costs.
3- Incentive to reduce pollution, most polluting firms pay more than the least polluting firms.
4- Low administrative costs.
What are disadvantages of indirect taxes?
1-Ineffective in reducing pollution if demand is price inelastic.
2-Difficulty of setting an appropriate tax because of the problem of quantifying the external cost.
3- increased business costs.
What is a subsidy?
It is a government grant to businesses that reduces production costs.
What is the effect of a subsidy on the supply curve?
Supply curve shifts to the right resulting in decreased price and increased quantity demanded.
What are the advantages of a subsidy?
1- Reducing the costs of production enables firms to reduce the price.
2- Incentive for increased consumption, if the good has positive externalities, society will benefit.
3- Might help reduce inequality.
What are the disadvantages of a subsidy?
1- Cost to the government and taxpayers thus there is an opportunity cost.
2- Ineffective if demand is inelastic
3- Difficult of setting an appropriate subsidy due to the problem of quantifying the external benefit.
What is a maximum price?
It is a price, usually set by the government, which makes it illegal for firms to charge more than a certain price for a given quantity of a product.
Where is the maximum price set
Below the equilibrium price.
What are advantages of a maximum price?
1- They enable consumers on low incomes to be able to afford a product.(welfare gain)
2- They help prevent an increase in the countries rate of inflation.
3- They help prevent exploitation of consumers by monopolies.
What are disadvantages of a maximum price?
1- Shortages occur which may result in a black market, where suppliers of the product sell it illegally at a price significantly higher than the market price.
2- Shortages may mean that consumers are unable to find suppliers of the products.
3- Producers may exit the market in order to use their resources to produce goods that are more profitable.
What is a Minimum Price scheme?
A price set by the government that is guaranteed to producers. It is a price flaw above the equilibrium price.
What are the advantages of a minimum price scheme?
1- Protecting producers: A minimum price can ensure that producers receive a certain income level, particularly in sectors where production costs are high, or market fluctuations may lead to unstable incomes. Agricultural products, for example, often have minimum prices to protect farmers.
2- Encouraging production: By guaranteeing a higher price, a minimum price can provide an incentive for producers to increase production, which may be essential for food security or other strategic sectors.
3- Reducing consumption: In some cases, minimum prices may be used to discourage consumption of certain goods or services, such as alcohol, tobacco, or gasoline. Higher prices can lead to lower demand, helping to address negative externalities associated with their consumption.
4- Correcting market failures: Minimum prices can help address market failures, such as in the case of monopoly power, where a single firm can set prices significantly above the competitive level.
What are the disadvantages of a minimum price scheme?
1- Surplus production: By setting prices above the equilibrium level, minimum prices can lead to surplus production, as the quantity supplied exceeds the quantity demanded. This can result in wasted resources or increased storage costs.
2- Inefficient resource allocation: By encouraging overproduction in certain sectors, minimum prices can lead to a misallocation of resources, as factors of production are not being directed towards their most efficient use.
3- Higher prices for consumers: While minimum prices can benefit producers, they can lead to higher prices for consumers, which may disproportionately impact low-income households.
What is a Tradeable pollution permit?
They are government issued permits to firms that allow the firms to pollute up to a certain limit. Any pollution above this limit is subject to fines. Permits may be traded between firms.
What is an advantage of Tradeable pollution permits?
1- They are incentives for firms to reduce pollution.
What is a disadvantage of tradeable pollution permits?
1- Large firms might buy up the permits and continue to pollute.
2- Pollution will still continue, just at a lower level.
What is state provision of public goods?
Where the government provides public goods which are non excludable and non rivalrous. For example Public goods like national defence, street lighting, and public parks are provided by governments to benefit all citizens.
What is the provision of information?
It is where governments provide information to consumers to ensure informed decision making. Example: Food labelling regulations require manufacturers to provide information about ingredients and nutritional content on food packaging, helping consumers make healthier choices.
What is regulation?
Regulation involves government rules and standards to ensure market participants follow specific guidelines.
For example there are regulations relating to the consumption of a product, e.g the age limits of buying cigarettes.
Which method of government intervention can reduce the production of demerit goods?
Indirect Taxes.
What is Government Failure?
When government intervention results in a net welfare loss, due to an inefficient allocation of resources.
What are the causes of government failure?
1- Distortion of price signals
2- Unintended consequences
3- Excessive administrative costs.
4- Information Gaps
How does government intervention lead to distortion of price signals?
Government interventions, such as price controls or subsidies, can distort price signals in markets. Distorted prices may not reflect true supply and demand conditions, leading to overproduction or underproduction of goods and misallocation of resources.
How does government intervention lead to distortion of price signals?
Government interventions, such as price controls or subsidies, can distort price signals in markets. Distorted prices may not reflect true supply and demand conditions, leading to overproduction or underproduction of goods and misallocation of resources.
How does government intervention lead to unintended consequences?
Policies aimed at addressing one problem may inadvertently create new problems or unintended consequences.
These unintended consequences can result from imperfect understanding of complex markets and behavioral responses.
Example: Cash transfer programs aimed at poverty reduction might discourage work among some recipients, leading to decreased labour force participation.
How does government intervention lead to excessive administrative costs.
Government interventions often involve administrative costs related to implementation, monitoring, and enforcement. Excessive administrative costs can reduce the net benefits of a policy.
Example: Complex regulations in the healthcare industry can lead to high administrative costs for both providers and government agencies, potentially limiting the resources available for patient care.
How does government intervention lead to Information gaps?
Government interventions may be based on incomplete or inaccurate information about market conditions or the behaviour of economic agents. This can lead to policies that do not effectively address market failures or achieve their intended goals.
Example: If regulators lack accurate data on pollution sources, environmental policies may fail to target the most significant pollution contributors effectively.
