1.4 Flashcards
Define gov failure
Government failure- when the government intervenes into a market to correct market failure but leads to a net welfare loss and misallocation of resources
4 types of gov failure
- Distortion of price signals eg subsides,taxes,min/max price
- Unintended consequences - effects which werent meant to happen
- Excessive administration cost- eg NHS money spent on organisation administration rather than medical care
- Information gaps, e.g.cannot predict number of cars on road = ineffective policy introduces
7 types of gov intervention
- Min/Max price
- Provision of information
- Provision of public goods
- Subsidies
- Indirect taxes( VAT and specific)
- Regulation
- Tradeable pollution permit
Define indirect tax
An indirect tax is a tax on consumer expenditure
Define tradeable pollution permit
Tradebale pollution permit allows the owner of the permit to pollute up to a specific amount. The government controls how many permits there are and businesses breaking the amount can be fined
Adv and dis of trade Alr pollution permit
ADV
- Decreased pollution as gov controls amount and permits
- Increased gov revenue by selling permits
- Companies may be forced to switch to greener technology if they cant afford to emit 0 carbon
- Benefit workforce through cleaner air = increased productivity
DIS
- Expensive to monitor
- Increased cost of production = increased cost for consumer
- Hard to know amount of permits needed
Adv and dis or regulation
ADV of regulation
- Prevent explotation of workers by imposing laws and caps= increases social welfare
DIS of regualtion
- Expensive for gov to monitor and opportunity cost
- Regulator capture can occur
- Increases cost for consumer as firm can oass cost onto consumer
- Excessive regulation = reduce competitiveness and efficiency by increasing red tape and innovation
Adv and dis of provision of info
ADV of provision of information
- Consumers can make rational decision on what benefits and harms them
DIS of provision of info
- Expensive and opportunity cost
- Consumer may not listen eg if goods is addictive or habit forming= irrational behaviour
Adv and dis of provision of public goods
ADV of State provision of public goods
- Corrects market failure by providing goods which are underprovided = increases social welfare
- External benefit of goods eg healthcare and education= increases equality as goods are accessible
DIS of provision of public goods
- Expensive and opportunity cost as can be spent elsewhere
- Gov could provide wrong goods or wrong amount as they are not market experts
- Gov can be x-inefficent as they have no incentive to reduce costs
- Gov can suffer corruption and conflict of objectives and could lead to moral hazard where officlas keep project funds for themselves
Define max price and diagram
Maximum price diagram
- Celing price which firms cannot charge above ( merit goods)
- Causes excess demand
- Extension in demand
- Contraction in supply
Define min price and diagrma
Minimum price diagram
- Legally imposed price which producers cannot charge below (demerit goods)
- Causes excess supply
- Contraction in demand
- Extension in supply
Define subsidy and diagram
A subsidy is a grant given by the government to lower costs of production and increase output
Subsidy diagram
Subsidy info and eval
ADV
- Increases consumer and producer surplus
- Reduce cost for merit goods= positive externality
- Helps accesbality of goods for low income households= decreased inequality
EVAL
- Magnitude= small sub= small impact
- Opportunity cost= spent elsewhere
- Hard to find corect amount tp pay
- Can make producers dependent= inefficient when subisy is removed
- Distorts market in LR
Vat and specific tax diagram
Define VAT and give info for diagram
VAT- tax imposed on goods where the value of the tax is dependent on the value of the goods
VAT diagram info
- More elastic demand or inelastic supply= lower tax burden on consumer
- More inelastic demand= higher tax revenue = larger burnden on consumer
Define specific tax and give info
Specific tax is a tax imposed on goods where the value of the tax is dependant on the quantity bought
Tax info
- Increases gov revenue
- Decreases consumer and producer surplus
- Regressive= lower income households affected more= increase inequality
- Tax internalises external costs which moves us to social optimum
- Increases cost of production= decreases supply of demerit goods
- Depends on elasticity how effective it is eg petrol=inelastic so people may still buy it
