1.4 government intervention Flashcards
why do governments intervene
-to correct market failure
indirect taxation- ad velorum
-percentages such as VAT
-rises with revenue
indirect taxation- specific taxes
-set tax per unit
-The more inelastic the demand, the higher the tax burden for the consumer, and the lower the burden of tax for the producer.
subsides
-payment from government to producers to enable them to produce more goods with positive externalities
-Consumers gain more from the subsidy when demand is price inelastic, whilst producers supply more when demand is price elastic
maximum prices
-set so products do not become too expensive to produce or consume
-have to be set below free market price
-could lead to market failure if misjudged
-would cause excess supply if not set
minimum prices
-ensures the good never falls below a certain price
-e.g. minimum wage and min price of alcohol
-have to be set above free market price
tradeable pollution permits
-limits amount of negative externalities in terms of pollution
-pollution will fall to targets set by gov
advantages of trade pollution permits
-benefits environment
-gov can raise revenue to be invested in green tech
-greener firms can sell their permits giving them a bigger revenue
disadvantages of trade pollution permits
-could lead to firms relocating to places where they can pollute
-firms may pass higher prices on to consumers
-expensive to monitor emmisions
state provision of public goods
-gov can provide public goods which are underprovided by free market such as healthcare
-makes merit goods more accessible
-can be expensive and opportunity cost for government
provision of information
-governments can ensure there is no information failure, so
consumers and firms can make informed economic decisions
-helps consumers act rationally
-expensive to police
regulation
-laws to ban consumers from consuming certain goods
-e.g. school till 16 has pos externalities of skilled workers
-helps overcome market failure
-expensive to monitor
-may pass on costs to consumers
what is government failure?
-when govt intervention in a market leads to net welfare loss and misallocation of resources
causes of govt failure- distortion of price signals
-distorts the free market mechanism
-keeps inefficient companies in business
-e.g. subsides keeping farmers in business when they cannot produce cheaply enough to be competitive
-max and min prices lead to excess supply and demand
-resources may be allocated inefficiently
causes of govt failure- unintended consequences
-consumers and producers may react to policies in unexpected ways
