1.4 Government intervention Flashcards
How do you draw a tax box onto a S and D diagram?
Tax box goes from new equilibrium down to new one
Draw this as whole tax box
Consumers pay price, producers pay the rest
Complete market failure
no goods supplied in the market at all
How do you draw a subsidy box onto a S and D diagram?
Subsidy box goes from new equilibrium up to new one
Draw this as whole subsidy box
Consumers pay price, producers pay the rest
Partial market failure
over/ under production of goods
How can governments intervene with markets?
Ad valorem taxes
Specific taxes
Subsidies
Max prices
Min prices
Regulation
Trade Pollution permits
State provision of public goods, by making people pay taxes
provision of information
Specific tax
A tax expressed as a fixed value
Supply curves of before and after are in parallel
Ad valorem tax
A tax expressed as a percentage
The higher the quantity, the higher the tax
Supply curves of before and after are not in parallel
What can subsidies do to positive externality diagrams
The gov could give a firm a subsidy so they can operate at MSB instead of MPB to correct market failure
How do elasticities effect taxes/ subsidies on supply demand curves?
The bigger the YED and smaller the PED, then the bigger the price difference
so more put on consumers
The smaller the YED and bigger the PED, then the smaller the price difference
so less put on consumers
Ad valorem tax
A tax expressed as a percentage The higher the quantity, the higher the tax Supply curves of before and after are not in parallel
Specific tax
A tax expressed as a fixed value Supply curves of before and after are in parallel
Trade pollution permits
The gov give out permits to firms to emit CO2 these firms can buy/ sell these permits if wanted/ needed reduces pollution as it’ll be too expensive to emit if emitting a lot
Public choice theory
assumes politicians act in a way that maximises their own benefit and not the economy/ society
Administration
occurs when a business can no longer meet its debt obligations
Policy short termism
when politicians are too focused on short term, for votes can lead to gov failure in long term
Regulatory capture
when the gov operates in favour of producers rather than consumers
Bureaucracy
a complex organisation that has multi-layered systems and processes
Red tape
refers to bureaucracy which is no longer useful (redundant)
