1.4 government intervention Flashcards
what are indirect taxes?
taxes on expenditure and include taxes such as VAT, excise taxes and taxes on gambling
what does indirect taxes cause?
increase in cost of supply and so cause the supply curve to shift to the left
what may indirect taxes be used for?
dealing with external costs, internalise the externality by taxing the product so that output and consumption are at the level that SMB = SMC
what are advantages of indirect taxes?
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
what are disadvantages of indirect taxes?
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
what are subsidies
subsidy is a grant to the businesses that reduce production costs, encouraging production until socially optimal level is reached.
what can subsidies result in?
product or services can be provided at a lower price.
what are advantages of subsidies?
reduction in cost or production enabling suppliers to reduce the price, incentive for people to increase consumption, might help reduce inequality
what are disadvantages of subsidies?
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
what is a minimum price?
price which is set by the government, below which the price is not allowed to fall, (illegal to fall below)
how is the minimum price made effective?
set above the free market equilibrium price
what are advantages of minimum prices?
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
what are disadvantages of minimum prices?
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
what is the minimum price impact on consumer surplus?
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
what is the minimum price impact on producer surplus?
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
what is maximum price?
price set by the government, which the price is not allowed to rise above
how is maximum price made effective?
price needs to be set below the free market equilibrium price
what are the advantages of maximum price?
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
what are disadvantages of maximum price?
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
what is the maximum price impact on consumer surplus?
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
what is the maximum price impact on producer surplus?
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.
what problems may occur due to minimum prices?
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
what problems may occur due to maximum prices?
shortage of supply- disequilibrium will need to be maintained, black market, some consumers will not be able to consume the good- will miss out
what is a pollution permit?
another scheme which method is to reduce external costs, government issues permits to firms that allow them to pollute up to a certain limit
what is the purpose of pollution permits?
alternative way to reduce pollution in the production of goods, cap and trade schemes
how do pollution permits work?
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)
what are advantages of pollution permits?
-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
what are disadvantages of pollution permits?
-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
what is state provision public goods?
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
what are advantages of state provision public goods?
government can provide exact level of goods deemed optimal by society, ensuring that all people have access
how do indirect taxes also reduce carbon emissions?
variable alternatives, raises price of polluting activity, tax should be equal to external costs
what are advantages of using pollution permits rather than taxation?
creates stronger financial incentives to cut pollution than taxes, clearer limit on pollution, easy to adjust tax levels in one place
what are disadvantages of using pollution permits rather than taxation?
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
what is provision of information?
if there is little information or asymmetric information, the government can provide the information itself
what are advantages of provision of information?
more significant changes to societies habits than simply raising price through taxes
what are disadvantages of provision of labour?
awareness campaigns can be ignored, may not have much impact in the short run
what are examples of provision of labour?
lack of information (awareness campaigns, e.g smoking)
asymmetric information (government forcing banks to make information clear)
what is regulation?
could impose maximum levels of pollution, could ban certain production completely, could impose minimum or maximum prices, require companies to provide information
what are advantages of regulation?
easy to make consumers and producers be aware and understand requirements, cheap process to run and enforce
what are disadvantages of regulation?
finding the right level of intervention can be hard, if not backed up with sanctions people may ignore it
what is government failure?
intervention that results in a net welfare loss, outcome on society worse with intervention than left in the market
what are causes of government failure?
distortion of price signals, information gaps, unintended consequences, administrative costs, political lobbying
what is the distortion of price signals?
government policies distort prices that would otherwise be created by the market (taxes, subsidies, min/max prices)
what is information gaps?
government officials lack the required information they may struggle to make proper informed decisions
what are unintended consequences?
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
what are administration costs?
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
what are housing policies?
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
what are environmental policies?
subsidies have been given for the establishment of wind farms but many argues that the energy provided by them is relatively unstable, environmental eyesore
what are agricultural stabilisation schemes?
minimum guaranteed prices, schemes could result in massive surpluses, surpluses imply that resources may not be allocated efficiently
