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Econ Theme 1 > 1.4 Government Intervention > Flashcards

1.4 Government Intervention Flashcards

1
Q

How is indirect tax used by the government?

A
  • indirect tax is a method a government can intervene in order to correct market failure caused by negative externalities from production
  • tax brings the new equilibrium in line with social optimum equilibrium
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2
Q

What is indirect tax?

A
  • tax on expenditure
  • it is paid by the producer to inland revenue
  • however the producer can pass on the burden of tax to the customer + does to varying degrees
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3
Q

What factors affect the price of goods with indirect tax?

A

Depends on:
- PED
- size of tax

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4
Q

Impact of indirect tax?

A
  • increases costs of production to the supplier
  • so the supply curve makes a parallel shift to the left
  • tax is initially paid by producer - but they may pass on the burden to customers
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5
Q

Advantages of indirect tax?

A
  • ‘polluter pays’ - principle of the producer responsible for negative externality pays
  • the tax can adjust according to size of the problem ( external costs)
  • the government could use the tax revenue to reduce negative externalities by investing in cleaner methods or offering subsidies in e.g. public transport, renewable energy, sugar free drinks
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6
Q

Disadvantages of indirect tax?

A
  • hard to measure external costs in some case -> difficult to put a monetary value on it
  • sometimes hard to trace the origins of atmospheric pollution - which firms are responsible?
  • other things being equal an indirect tax makes the distribution of income less equal - a specific or lump sum direct tax will take a greater proportion of a lower revenue (e.g. smaller firms)
  • higher taxes imposed by the government may discourage investment by firms or make Uk firms less competitive in the global market -> this suggests global issues of negative externalities + climate change need global solutions
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7
Q

What affect will indirect tax have on an inelastic PED?

A
  • IF PED is inelastic, demand (MSB=MPB) curve has a steep gradient, the tax will not influence the quantity significantly
  • e.g. litres of petrol consumed
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8
Q

Unintended consequences of indirect tax?

A
  • higher taxes may lead to smuggling from abroad
  • people may try and find ways around taxes
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9
Q

What is minimum price?

A
  • price floor (lowest price)
  • it is implemented because the equilibrium price is too low (implies existence of negative externalities)
  • therefore, the minimum price is set above the equilibrium
    -e.g. price of alcohol
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10
Q

How is minimum price used?

A

this can be used to make a product more expensive due to it being above the market price -> discourage demand

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11
Q

Disadvantages of minimum price?

A
  • could cause excess supply (disequilibrium)
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12
Q

What is the impact of minimum price dependent on?

A

depends of the PED/PES of a good or service
- if PED/PES is elastic, the percentage change in quantity demanded + supplied is high so bigger excess supply - but effective in reducing quantity demanded if that is the aim e.g. alcohol
- if PED is inelastic, % change in quantity demanded + supply is smaller

Also depends on how high minimum price is set above the market clearing price

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13
Q

What is maximum price?

A
  • ceiling price
  • it is used when the equilibrium price is thought to be too high + so it is set below the equilibrium price
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14
Q

Examples of maximum price

A
  • highest rent a landlord can charge for housing - however could lead to homelessness if prices are too high
  • maximum wage - the highest wage an employer can be paid
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15
Q

How is maximum price used?

A
  • used to make goods more affordable
  • price ceiling causes an excess in demand
  • this is solved through rationing -e.g. queues
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16
Q

Disadvantages of maximum price?

A
  • could lead to a shortage or worse government failure - e.g. housing shortage if housing becomes too affordable
  • a secondary (black) market may emerge - undeclared transactions would reduce tax revenue
  • excess demand can make the allocation of resources worse + can be a source of government failure
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17
Q

What is a subsidy?

A
  • a payment by the government to suppliers that reduce their costs of production + encourages them to increase output
  • this encourages firms to produce more
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18
Q

What are subsidies applicable for?

A

Goods with external benefits

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19
Q

Subsidy examples?

A
  • renewable energy
  • public transport
  • biofuels
20
Q

Affect of subsidy on graph?

A
  • subsidy lowers the cost of production + increases supply -> causes the supply curve to shift to the right + lower equilibrium price
  • this creates an equilibrium at the socially optimum output
  • this helps to correct the misallocation of resources as there is a net welfare gain from being at the socially optimum
21
Q

Why are subsidies used?

A
  • used to encourage the use of merit goods
  • e.g. health, education, childcare
22
Q

Disadvantages of subsidies to government?

A

Costs to the government:
- opportunity cost - reduction in spending on other areas e.g. welfare services
- increase tax which reduce incentives + distort the market
- increase borrowing which is already high -> budget deficit = the amount a government borrows in a year

23
Q

Disadvantages of subsidies to producers?

A
  • if a producer becomes reliant on subsidies it can lead to inefficiency - whereas without a subsidy the firm has an incentive to make profit + minimise average costs - productively efficient
24
Q

Examples of state provisions

A
  • NHS
  • state schools
  • prisons
  • roads
25
Q

What are state provisions?

A
  • the state pays for the good or service which is then free at the point of use to the recipient
26
Q

Why does the market fail in providing merit goods? (Under consumption)

A
  • if the market provided education/health these goods would be under consumed (positive externality diagram)
  • this is because some individuals would not be able to afford it
  • individuals do not take into account external benefits + so they underestimate the true value of the benefits of health + education
27
Q

Why does the market fail in providing merit goods (maximising profit)

A
  • private companies aim to maximise profits - may lead to exploitation (asymmetric information) as medical practitioners know more than patients so may offer unnecessary treatments
  • monopolies - high economies of scale available - e.g. buying all surgical equipment
  • if there is a monopoly, one major producer of healthcare may be less incentivised to provide an efficient service + quality of provision may fall
28
Q

Why does the market fail to provide healthcare?

A
  • the demand is uncertain - individuals do not know when they are going to fall ill or require healthcare
  • so private healthcare can be provided through health insurance
29
Q

Why is the demand for healthcare increasing?

A
  • ageing + increasing population - average age of population increasing
  • higher expectations/increased awareness with self diagnosis
  • improved medical research
  • obesity levels increasing
30
Q

How do trade-able pollution permits works?

A
  • polluters can bid for a permit that allows them to create a fixed amount of pollution
  • these permits can be resold (if production becomes cleaner) - firms have an incentive to reduce carbon emissions so they can make cost savings from selling permits
  • government can gradually reduce the number of pollution permits available so that total pollution emissions can be controlled
31
Q

Impact of pollution permits?

A
  • gradually total amount of pollution allowed can be reduced
  • as the stringency of pollution limit tightens, the value of permit may rise
  • supply shifts to the left, equilibrium price rises
  • they will be more valuable to companies that can bring down pollution levels (higher cost savings)
32
Q

Advantages of pollution permits?

A
  • give firms/organisations an incentive to reduce pollution
  • assuming they reduce pollution below the agreed limit they can sell off the permit to other firms or to the government
  • better than regulations as firms aren’t just encouraged to lower pollution below limit but also to continue lowering pollution as there is an award
33
Q

Disadvantages of pollution permits?

A
  • high administrative costs associated with monitoring pollution emissions - particularly if number of firms involved is large
  • relies on the fact that external factors can be measured
  • larger firms will be able to afford permits more than smaller firms + so pollution may not fall as large firms buy permits instead of investing in cleaner energy
  • permit may act as a barrier to entry into the market leading to an monopoly
  • most counties aren’t part of the emissions trading scheme e.g China - little chance of reducing global emissions
  • higher costs for firms in countries that adopt these permit - reduces competitions internationally - leading to closure of firms
34
Q

The effectiveness of tradeable permits depends on:

A
  • the negative externalities being measurable
  • the permits being expensive enough to give producers the incentive to lower pollution
  • ideally the issue of policies to correct environmental damage is resolved by a global solution as it is a global issue
  • issue of pollution may be tackled by a combination of policies e.g. tax, regulations, pollution permits
35
Q

What is information provision?

A
  • aim is to address market failure caused by information gaps
  • the idea is with more information economic agents will make better, informed decisions (consumers and producers) - better resource allocation
36
Q

Evaluation of information provision?

A
  • necessary but not always sufficient enough as a method of government intervention
  • needs to be reinforced by regulation e.g. smoking is banned in public places, advertising of smoking is banned
37
Q

What does information provisions rely on?

A
  • quality of information + reliability
  • how easily it is understood by people e.g. traffic lights is eye catching
  • some information can sometimes vary e.g. healthy foods, recommended alcohol intake, impact of vaping etc
38
Q

Examples of information provisions?

A
  • to encourage healthy goods + services e.g. fruit + veg, exercise
  • to discourage the production of+ consumption of unhealthy goods + services e.g. tobacco - health warnings on cigarette boxes, traffic light system of nutritional content of food
  • benefits of saving for pensions (a merit good)
  • drink driving
39
Q

What are regulations?

A

Laws/ rules that individuals/firms have to adhere to

40
Q

What are the aims of regulations?

A
  • aiming to reduce/ eliminate negative externalities and/or promote positive externalities e.g. attending school is compulsory
  • e.g. laws on atmospheric pollution, noise pollution etc.
41
Q

What happens if regulations are broken?

A

Firm/individual are fined

42
Q

What is the impact of regulations on supply + demand?

A
  • regulations on businesses may cause costs to increase (dbs checks, health and safety regulations)+ shift the supply curve to the left
  • regulations can open new opportunities to businesses -> e.g. businesses who supply safety equipment, demand for products may shift o right
  • PPE equipment for covid - high potential for profit as PED is inelastic (necessity)
43
Q

Advantages of regulations

A
  • individual circumstances can be analysed, and appropriate action taken
  • easily understood by firms - not likely to lead to disputes when firms break limits
  • as long as it can easily assessed whether the regulation has been broken or not
44
Q

Disadvantages of regulations

A
  • inspectors need to be employed at a cost - e.g. traffic wardens or speed cameras
  • investigations are often expensive, time consuming + only deal with a fraction of the cases
  • external costs need to be measurable e.g. pollution
  • may not be much of a deterrent - so fine needs to be high enough to alter behaviour
  • the fine has a greater impact on people of low incomes so perhaps fines should be mean tested
  • unintended consequences - comes from the idea that human beings will do what they can to get around a law. E.g. motorists speed up + then slow down at cameras
45
Q

Disadvantages of regulations (businesses/firms)

A
  • the fines need to be greater than the cost of altering the production - so firms have an incentive to reduce external costs + not just continue and pay the fine
  • regulations can only be used when the actions are easily measured
  • best use with a range of policies e.g. indirect tax, subsidies

Econ Theme 1 (11 decks)

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