1.4 government intervention Flashcards
what is an ad valorem tax
is a percentage of the price of the good or service. Thereby the more expensive the product, the greater the lax levied on it
top 3 moves of govt intervention
Indirect taxation ad volorem and specific
Subsidies
Maximum and minimum prices
how can indirect taxation reduce market failure
Increases cost of supply for a firm –> shift supply curve up & to the left –> quantity will decrease & price increases
incidence
amount
how can subsidies reduce marekt failure
decrease in the cost of supply so it’ll rise —> shift in the supply curve down & right —> quantity increases & price decreases
how can min and max prices reduce market failure
The imposition of a min price will lead to excess supply as firms wish to supply more at a higher price
how can trade pollution permits reduce market failure
Allow firms to produce a legal level of pollution every year. They are tradable, where a firm that doesn’t use all of their permits can sell them to others who pollute over their allowance. This provides financial incentives for firms to reduce pollution
how can state provision of public goods reduce market failure
Provision of information ensures economic units can maximise decisions when consuming & producing goods & services.
The govt will provide information where the private sector fails to do so
how can regulation reduce market failure
to create competitive markets, to protect the interests of consumers so that they are not exploited by firms
if effective, this will lead to greater choice and lower prices.
eg. telecoms, water, energy, gambling, fishing
define the law of unintended consequences
that unexpected events occur due to govt intervention.
causes of govt failure
distortion of price signals
unintended consequences
excessive admin costs
information gaps
govt failure as it relates to various markets
Government failure occurs when resource allocation in a given market is more inefficient then before the government intervened.
