1.4 Governemt Intervention Flashcards
What is government intervene
Governments intervene in the market to correct market failure
What does indirect tax do ?
Indirect tax are directly on a good or service
- > effect on producers
- > increase production cost
- > supply less
(Demerit goods)
Two types of tax
Ad valorem = taxes are percentages, such as VAT, which adds 20% of the unit price. This is the main indirect tax in the UK.
Specific tax = Specific taxes are a set tax per unit, such as the 58p per litre fuel duty on unleaded petrol.
Subsidy
subsidy is an amount of money provided to firms to help reduce production costs which can then be passed on as lower prices, and which can encourage consumption.
Subsidies encourage …
Consumption of merit goods = external benefit is internalised.
Disadvantage of subsidy
disadvantages of subsidies include the opportunity cost to the government and potential higher taxes, the potential for firms to become inefficient if they rely on the subsidy and government failure, if they subsidise less efficient industries.
Maximum price
price set below the market equilibrium price by the government
What can max price cause
Excess demand
Max price effect on government
Deal with excess demand
-> may use subsidy
Problems can be that opportunity cost may arise or potential use of black market = gov failure
Max price effect on producers
Lower prices - lower revenue
Lower quantity = lower jobs
Mar price effect on consumers
Lower prices are good for them however of there excess demand they may not able to buy it
Minimum prices
set above the free market price
Why do government set a minimum price
Safeguard income of producers and good enough wage for labour workers
Min price effect on government
- have to buy that excess supply
- opportunity cost
Min price effect on producers
Increase in revenue
