1.4 Government Intervention Flashcards
How does indirect taxes reduce market failure?
It increases the cost of production for firms so they supply less, therefore internalizing the externality
What are the advantages of using indirect taxation? 2
It internalizes the externality, therefore production is at the social optimum and social welfare is maximized
It increases government revenue
What are the disadvantages of using indirect taxes? 5
It is hard to quantify externalities so its hard to determine the level of taxation required
If the good is inelastic it will be ineffective
Indirect taxes are regressive
It can lead to the creation of black markets
Taxes are politically unpopular
How do subsidies reduce market failure?
It reduces firms cost of production, so they produce more and therefore society can reap the positive externalities of the service
What are advantages of subsidies? 2
They increase social welfare
They promote enterprise
What are disadvantages of subsidies? 4
They carry a large opportunity cost
They are hard to set
It can lead to over reliance
They are hard to take away once introduced
What are maximum and minimum pricing schemes?
A maximum pricing scheme sets a cap on the price of a good or a service below the market equilibrium. It means producers cannot charge a higher price than what the maximum price is set at. This promotes the consumption of these goods with positive externalities
What are advantages of minimum and maximum pricing schemes? 2
They can be set at MSB = MSC so social welfare can be maximised
They increase equality because they give consumers fair prices and allow producers a minimum income
What are the disadvantages of maximum and minimum pricing schemes? 3
It is hard to set
It distorts price signals
It can cause black markets to be made
What is a buffer stock scheme?
This is when agricultural products have a minimum price set on them, the government buys the stock that isn’t sold and then they sell it at the minimum price later on when prices reach that level.
What are tradable pollution permits?
They are a market based scheme where firms are given a fixed number of permits which allow them to pollute, if they pollute more they must pay fines or buy other permits. If they pollute less they can sell the remainder of their permits.
What are advantages of TPP’s? 4
They give firms autonomy to choose whether they want to pay fines or buy more permits
The number of permits can be controlled so pollution can be minimized
It promotes efficiency and innovation
It raises government revenue
What are disadvantages of TPP’s? 3
It is hard to know how many permits to sell
It is expensive to monitor and police
It will raises prices for consumers as it raises firms cost of production
What are advantages of state provision of public goods? 4
Competitive Tendering means that projects can be done efficiently
It corrects market failure
It reduces inequality as everyone has access to the same basic level of resources
The goods themselves have positive consequences
What are the disadvantages of state provision of public goods? 4
It carries a big opportunity cost
Governments don’t know which combination of goods to produce
Governments will be less efficient
Government officials may have conflicting objectives
What are the advantages of provision of information? 2
It covers information gap and corrects market failure
It is highly effective when used with other policies
What are the disadvantages of provision of information? 3
Opportunity cost
Governments themself might not have perfect knowledge
Consumers may not listen
What are the advantages of using regulation? 1
It fully considers the externality and takes this into account so can correct market failure
What are the disadvantages of using regulation? 5
It is expensive to enforce and pass on
It can increase bureaucracy in markets and reduce competition
Higher costs can be reflected on consumers
Regulatory Capture
Firms will be affected in different ways by laws so regulation may overgeneralize
What is government failure?
When government failure leads to a worse allocation of resources and a net welfare loss.
What are the 4 types of government failure?
Excessive admin cost
Law of Unintended Consequences
Information Gaps
Distortion of Price Signals
