1.4 government intervention Flashcards
1
Q
pros to indirect tax
A
- internalises the externality
- Source of revenue for the government that
can be used by those affected by the
externality - Few administrative costs
2
Q
cons to indirect tax
A
- If demand is inelastic will be ineffective in reducing pollution
- Difficulty in setting an appropriate tax
- Increased business costs
-creation of a black market
-taxes are unpopular
3
Q
pros to subsidies
A
- Reduction in costs of production, therefore reduction in price
- Incentive for people to increase consumption
- Might help reduce inequality
- social optimum is reached so maximises welfare
4
Q
cons to subsidies
A
- Cost to the taxpayer of providing subsidies
- If demand is inelastic can be ineffective in the increase of consumption
- Difficulty setting the appropriate amount for the subsidy
5
Q
pros to max prices
A
- Enable consumer on low incomes to afford the good or service
- Help prevent an increase in the country’s rate of inflation
- Prevent exploitation of consumer by monopolies
6
Q
cons to max prices
A
- Danger that shortages mean some consumers are unable to find supplies of the product
- Producers may exit the market to use resources in something more profitable
- If government subsidises producers to maintain output this is a significant cost to the taxpayer
7
Q
what is tradeable pollution permits
A
- Government issues permits to firms allowing them to pollute to a certain limit
- Any pollution above this limit is then fined
- The permits can be traded between firms
- Cleaner firms can sell their surplus permits to other firms that are polluting more
- Used to reduce external costs
8
Q
pros to tradeable pollution permits
A
- These schemes work through the market mechanism
- Incentive for firms to reduce pollution
- Administration costs are low compared to systems of regulation
- Can be planned reduction in pollution over time
9
Q
cons to tradable pollution permits
A
- Pollution will continue (at a lower level than previously)
- Large, efficient firms can buy up the permits and continue to pollute
- Need to be internationally enforced to be effective
- Might make country’s goods less competitive internationally
10
Q
pros to state provision of goods
A
- Ensures the product or service is being provided and available to everyone
11
Q
cons to state provision of goods
A
- Politicians determine the amount of resources allocated to these public goods without direct reference to the consumers
12
Q
pros to provision of information
A
- allows for consumers to act rationally
13
Q
cons to provision of information
A
- expensive
- has to be used with other methods
- consumers may not listen
14
Q
pros to regulation
A
- Act as an incentive to producers to develop new technologies that reduce the external costs
- Limit external costs without an impact on the price
15
Q
cons to regulation
A
- Enforcement of laws/regulations have a cost
- firms may pass on costs
16
Q
what is gov failure
A
- When government intervention in an attempt to correct market failure causes output and consumption to move further away from a socially efficient output
- Results in a more inefficient allocation of resources leading to a net welfare loss
17
Q
what is distortion of price signals
A
- The manipulation of prices
- Maximum and minimum prices controls
18
Q
what is administration costs
A
- The costs of some government intervention systems and schemes can have excessive costs
19
Q
Why might a government intervene into the economy
A
- Address marker failures
- Raise revenue
- Social or political reasons
20
Q
Forms of government intervention
A
- Indirect taxes
- Subsidies
- Minimum and maximum prices
- Tradable pollution permits
- State provision of public goods
- Provision of information
- Regulation
21
Q
Indirect taxes impact
A
- Increase in the cost of supply
- Leftward shift to the supply curve
22
Q
What can indirect taxes deal with
A
- Deal with external costs
- Internalise the externality so that output and consumption are at the level where SMB = SMC
23
Q
what’s a subsidy
A
- Government grants to businesses that reduce production costs, causing a rightwards shift in supply curve
24
Q
When might subsidies be used?
A
- When there are external benefits of production or consumption
25
How will subsidies affect demand?
- Good or service will be provided at a lower price
- Encourage production so socially optimal level is reached
26
Why do subsidies effect the supply curve?
- Because they affect the cost of production
- Therefore they do not effect the demand curve
27
pros to min prices
- Producer know in advance the price they will receive for the product
- Greater certainty allows producers to plan investment and output
- Prevents exploitation of producers by wholesalers and retailers with significant buying power
28
cons to min prices
- Minimum price set too high there will be surpluses each year
- Schemes involve costs of storage which is borne by taxpayers
- Encourage overproduction resulting in inefficient allocation of resources
29
How does the manipulation of prices lead to government failure?
- They undermine the key functions of the price mechanism: signalling, rationing and incentives
- Leading to distortion of price signals
- Resources are not allocated efficiently
30
How can policies lead to government failure?
- Some types of government intervention may have an impact that policy-makers did not anticipate
31
How do information gaps lead to government failure?
- When a government intervenes it is unlikely they have all the required information
- Intervention could them move output further away from the socially optimum level
32
Indirect taxes (government failure example)
- Very high indirect taxes can result in smuggling to avoid tax
- No tax revenue
- Further away from socially optimum level of output
