1.4 government intervention

Question 1

what are indirect taxes?

Answer 1

taxes on expenditure and include taxes such as VAT, excise taxes and taxes on gambling

Question 2

what does indirect taxes cause?

Answer 2

increase in cost of supply and so cause the supply curve to shift to the left

Question 3

what may indirect taxes be used for?

Answer 3

dealing with external costs, internalise the externality by taxing the product so that output and consumption are at the level that SMB = SMC

Question 4

what are advantages of indirect taxes?

Answer 4

incentive to reduce pollution, source if revenue for the government that can be used to compensate those affected by pollution, few administrative costs involved with this method

Question 5

what are disadvantages of indirect taxes?

Answer 5

ineffective in reducing pollution if demand is price inelastic, difficulty of setting an appropriate tax because of the problem of quantifying the external costs, increased business costs

Question 6

what are subsidies

Answer 6

subsidy is a grant to the businesses that reduce production costs, encouraging production until socially optimal level is reached.

Question 7

what can subsidies result in?

Answer 7

product or services can be provided at a lower price.

Question 8

what are advantages of subsidies?

Answer 8

reduction in cost or production enabling suppliers to reduce the price, incentive for people to increase consumption, might help reduce inequality

Question 9

what are disadvantages of subsidies?

Answer 9

cost to the taxpayer of providing subsidies, ineffective in increasing consumption if demand is inelastic, difficulty of setting an appropriate subsidy because of the problem of quantifying the external benefit

Question 10

what is a minimum price?

Answer 10

price which is set by the government, below which the price is not allowed to fall, (illegal to fall below)

Question 11

how is the minimum price made effective?

Answer 11

set above the free market equilibrium price

Question 12

what are advantages of minimum prices?

Answer 12

producers know in advance the price they will receive for the product, greater certainty enables producers to plan investment and output, can prevent exploitation of producers by wholesalers and retailers who have significant buying power

Question 13

what are disadvantages of minimum prices?

Answer 13

if price set too high there will be surpluses each year, schemes involve costs of storage which must be borne by taxpayers, schemes encourage over production may therefore result in an inefficient allocation of resources

Question 14

what is the minimum price impact on consumer surplus?

Answer 14

consumer surplus decreases as price falls, making gaps between the market price and the price consumers are willing to pay smaller. however, consumers can overestimate benefits meaning that willingness to pay for fair reflection of utility they derive from it

Question 15

what is the minimum price impact on producer surplus?

Answer 15

producer surplus increases as price falls, making the gap between the market price and price producers are willing to pay larger. however, price elastic demand results in a relatively larger drop in sales, meaning that it could lead to revenue and profit falling

Question 16

what is maximum price?

Answer 16

price set by the government, which the price is not allowed to rise above

Question 17

how is maximum price made effective?

Answer 17

price needs to be set below the free market equilibrium price

Question 18

what are the advantages of maximum price?

Answer 18

they enable consumers on low incomes to be able to afford the product, helping prevent an increase in the countries rate of inflation, can prevent exploitation of consumers by monopolies

Question 19

what are disadvantages of maximum price?

Answer 19

danger that shortages mean some consumers are unable to find supplies of the product, products may exit the market in order to use their resources to produce goods that are more profitable, government subsidies producers to encourage them to maintain output, significant cost to taxpayer

Question 20

what is the maximum price impact on consumer surplus?

Answer 20

consumer surplus increases when the price falls, making the gap between the market prices and price consumers are willing to pay being smaller. however, if maximum price made smaller than consumer surplus could fall

Question 21

what is the maximum price impact on producer surplus?

Answer 21

producer surplus decreases as price falls, making the gap between the market price and the price which producers are willing to sell for smaller. however, governments combine a maximum price and producer subsidies then the profitability of firms may not be diminished.

Question 22

what problems may occur due to minimum prices?

Answer 22

creates surplus and disequilibrium needs to be maintained, some producers are happy to sell below minimum price, poorer houses likely to be disproportionately affected, government set price too low or too high- little to no impact

Question 23

what problems may occur due to maximum prices?

Answer 23

shortage of supply- disequilibrium will need to be maintained, black market, some consumers will not be able to consume the good- will miss out

Question 24

what is a pollution permit?

Answer 24

another scheme which method is to reduce external costs, government issues permits to firms that allow them to pollute up to a certain limit

Question 25

what is the purpose of pollution permits?

Answer 25

alternative way to reduce pollution in the production of goods, cap and trade schemes

Question 26

how do pollution permits work?

Answer 26

fixed number of emission permits allocated each year to polluting factories, allowed set amount of pollution, can be traded, factories which reduce pollution for less than price can sell spare, factories can buy permits if more extensive to reduce pollution, number of permits can be reduced each year (government can buy or remove from the market)

Question 27

what are advantages of pollution permits?

Answer 27

-uses market mechanism to change relative prices and incentives of producers and consumers
-costs of running this system are less than when an industry is subject to direct regulation
-selling of permits to businesses creates revenue which can be used for other schemes
-can create incentive for firms to invest in green technology

Question 28

what are disadvantages of pollution permits?

Answer 28

-too few pollution permits may increase production costs for firms making them less competitive internationally
-large fluctuations in price f pollution permits has created uncertainty for firms about whether it is worth investing in green technology
-very few examples of permit systems internationally, other forms of intervention are preferred by most governments

Question 29

what is state provision public goods?

Answer 29

public goods are non-excludable and non-rivalry, difficult for private businesses to profit from public goods due to them being non-excludable, ensuring a correct level of resources are allocated towards the goods, government can provide the goods or services directly

Question 30

what are advantages of state provision public goods?

Answer 30

government can provide exact level of goods deemed optimal by society, ensuring that all people have access

Question 31

how do indirect taxes also reduce carbon emissions?

Answer 31

variable alternatives, raises price of polluting activity, tax should be equal to external costs

Question 32

what are advantages of using pollution permits rather than taxation?

Answer 32

creates stronger financial incentives to cut pollution than taxes, clearer limit on pollution, easy to adjust tax levels in one place

Question 33

what are disadvantages of using pollution permits rather than taxation?

Answer 33

taxation creates greater revenues for the government meaning that they can be spent on alternate forms of intervention, difficult to value marginal external cost meaning difficult to set right level of tax

Question 34

what is provision of information?

Answer 34

if there is little information or asymmetric information, the government can provide the information itself

Question 35

what are advantages of provision of information?

Answer 35

more significant changes to societies habits than simply raising price through taxes

Question 36

what are disadvantages of provision of labour?

Answer 36

awareness campaigns can be ignored, may not have much impact in the short run

Question 37

what are examples of provision of labour?

Answer 37

lack of information (awareness campaigns, e.g smoking)
asymmetric information (government forcing banks to make information clear)

Question 38

what is regulation?

Answer 38

could impose maximum levels of pollution, could ban certain production completely, could impose minimum or maximum prices, require companies to provide information

Question 39

what are advantages of regulation?

Answer 39

easy to make consumers and producers be aware and understand requirements, cheap process to run and enforce

Question 40

what are disadvantages of regulation?

Answer 40

finding the right level of intervention can be hard, if not backed up with sanctions people may ignore it

Question 41

what is government failure?

Answer 41

intervention that results in a net welfare loss, outcome on society worse with intervention than left in the market

Question 42

what are causes of government failure?

Answer 42

distortion of price signals, information gaps, unintended consequences, administrative costs, political lobbying

Question 43

what is the distortion of price signals?

Answer 43

government policies distort prices that would otherwise be created by the market (taxes, subsidies, min/max prices)

Question 44

what is information gaps?

Answer 44

government officials lack the required information they may struggle to make proper informed decisions

Question 45

what are unintended consequences?

Answer 45

policy interventions may lead to effects that are unanticipated, individuals in society can be unpredictable and may respond unexpectedly to to policies, unintended policies can be positive or negative

Question 46

what are administration costs?

Answer 46

sometimes bureaucracy involved with administering a policy may become costly, costs of administering a policy may have benefits to society then there is a likely misallocation of resources

Question 47

what are housing policies?

Answer 47

state provision of housing at low rents might be thought to be desirable, but can prevent the market from working efficiently, limiting geographical mobility of labour

Question 48

what are environmental policies?

Answer 48

subsidies have been given for the establishment of wind farms but many argues that the energy provided by them is relatively unstable, environmental eyesore

Question 49

what are agricultural stabilisation schemes?

Answer 49

minimum guaranteed prices, schemes could result in massive surpluses, surpluses imply that resources may not be allocated efficiently