1.4 Government Intervention Flashcards
What is minimum pricing?
A form of government intervention where a legal minimum price for a good/service is set which sellers cannot exceed below
What are 4 reasons for minimum pricing?
- Tackling negative externalities
- Reduce poverty and inequality
- Stabilise income/volatile prices
- Tackling information gaps
Where is minimum price set on a supply/demand diagram?
Above the free market equilibrium (otherwise would be ineffective)
What are 5 issues with minimum pricing?
- Black markets/smuggling
- Regressive
- Depends on PED
- Government must ‘buy’ excess supply: to prevent unsold supply being sold for lower price
- Not allocatively efficient outcome
What is maximum pricing?
A form of government intervention where a legal maximum price for a good/service is set to prevent market price from rising above a certain level
What are 3 reasons for a maximum price?
- Encourage consumption of merit goods
- Protect consumers
- Reduce inequality
What are 2 examples of a maximum price?
- Rent controls
- Energy price cap
Where is maximum price set on the supply/demand diagram?
Below the free market equilibrium (otherwise would be ineffective)
What are 3 issues with maximum pricing?
- Imbalance of markets: excess supply
- Black markets
- Depends on PED
What is indirect tax?
A tax imposed by the government which increases the supply costs of producers
What are 3 reasons for indirect taxation?
- Generate revenue
- Prevent overconsumption of demerit goods
- Redistribute wealth
What are the 3 types of tax?
- Proportional: all have to pay the same rate of tax
- Progressive: those on higher incomes pay a higher rate of tax
- Regressive: those on lower incomes pay a higher rate of tax
What is a specific tax?
A tax per unit purchased e.g sugar tax, tobacco duties
Describe the specific tax diagram
- Leads to a production cost for firms, so supply shifts inwards
- Higher price leads to demand contracting
What is ad valorem tax?
A tax which depends on the value of the asset or price of the good e.g VAT, stamp duty
Why does the supply curve on the ad valorem tax diagram diverge?
The higher the price the greater proportion of tax paid, meaning that the supply curve is more elastic than the demand curve
What are subsidies?
A form of financial assistance (e.g tax breaks, cash payments) given by the government to individuals or groups
What is the purpose of subsidies?
It reduces the costs of producers, allowing them to increase supply within the market therefore reducing equilibrium price
What are 3 benefits of a subsidy?
- Increase the output of merit goods
- Protects jobs in a recession
- Promotes growth
What is the incidence of a subsidy?
Shows how the benefit of a subsidy is distributed between consumers and producers
What are 3 drawbacks of a subsidy?
- Subsidy dependency: firms rely on government support, discouraging private investment/innovation
- Opportunity cost
- Increased consumption depends on PED
How does PED affect subsidies?
- Elastic: consumers sensitive to price, reduction from subsidies will encourage consumption
- Inelastic: consumers resistant to price changes, reduction from subsidies will not significantly impact consumption
What is government failure?
When intervention into a specific market fails to achieve its intended goals and/or creates negative consequences
What are 4 causes of government failure?
- Unintended consequences: policies may have unforeseen consequences e.g new costs/impacts
- Administrative costs: may outweigh the welfare benefit
- Political self interest: public choice theory=politicians act in way that maximises their own utility rather than the economy e.g during elections
- Conflicting objectives: e.g cutting taxes but increased spending on defence
How is there government failure when rent controls are implemented?
- Less houses supplied to the market by landlords
- Black markets may develop: landlords only do cash only deals
- Unintended consequences: less houses means less workers required
What is a direct tax and 2 examples?
A tax paid directly to the government by the taxpayer e.g income tax, national insurance contributions (NIC)
