1.4 government intervention Flashcards
indirect tax and types
a tax levied on expenditure on goods and services including specific and ad-valorem tax
specific tax
a sales tax that is set at a constant amount per unit of sales (eg: plastic bag charge)
ad-valorem tax
a sales tax that is set at a percentage of the price (eg: VAT)
why use taxes?
government uses indirect taxes to correct market failure of negative externalities (internalise the externality)
subsidy
a grant given by the government to producers to encourage production of a good or service (eg: renewable energy production)
why give subsidies?
the government aims to encourage the production of merit goods which reduce negative externalities (internalise the externality) for example: electric cars lower pollution
price controls
maximum and minimum price
maximum price
a regulation to make merit goods more affordable
minimum price
a regulation to make demerit goods more expensive or so producers get a fair price
why use max/min prices?
imposed on goods and services to reduce negative externalities or encourage positive externalities by encouraging or discouraging production and consumption through price controls
tradeable pollution permits
*the government will set an optimal level of pollution and allocate permits to firms to try control pollution
*firms are able to trade their permits with other firms so they can pollute more or less
*this encourages firms to become more efficient and pollute less internalising the negative externality of pollution
disadvantage of tradeable pollution permits
the optimal pollution level can be difficult to set because if too high firms have no incentive to lower their emissions but if too low forms may relocate to other countries
state provision of public goods
when the government provide a good or service free of charge to everyone which corrects the market failure
provision of information
the government provides or forces companies to give information to consumers to allow them to make informed decisions (for example: labels on cigarette packets)
regulation
governments create rules to limit harm from negative externalities of consumption/production
government failure
occurs when the government intervenes in a market to correct market failure but instead results even greater welfare loss and greater misallocation of resources
causes of government failure
*distortion of price signals
*excessive administrative costs
*information gaps
*unintended consequences
distortion of price signals
may causes inefficient allocation of resources if the government information or estimates are incorrect (for example: a minimum price sends a signal to producers to supply more which ends up going to waste)
excessive administrative costs
high monitoring and enforcement costs make some government intervention expensive to implement and the costs may be more than the social benefit
information gaps
governments may lack sufficient knowledge about market conditions leading to inefficient policies
unintended consequences
policies can lead to unforeseen effects counteracting the intended benefits such as black/illegal markets as producers and consumers prioritise their self interest
