1.4 government intervention and failure Flashcards
what is a tax?
charges on individuals and organisations by governments
what is the difference between an indirect and a direct tax?
what are the two types of indirect tax?
specific tax
ad valorem tax
what is the difference between the two types of indirect tax?
specific tax -
ad valorem tax -
what is producer tax incidence?
the burden of a tax on the produer
what is consumer tax incidence?
the burden of a tax on the consumer
what is deadweight loss?
a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium
what is a subsidy?
payments to producers by the government to reduce the costs of production
- Under what circumstance would tax burden fall mainly on the consumer?
- Under what circumstance would tax burden fall mainly on the producer?
- Explain in words why taxes result in deadweight loss
Give 2 benefits of indirect taxes over other forms of intervention to correct a market failure
Give 2 disadvantages of indirect taxes over other forms of intervention to correct a market failure
give reasons why governments may wish to subsidise a product
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Give 2 benefits of subsidies over other forms of intervention to correct a market failure in a market of your choice
Give 2 disadvantages of subsidies over other forms of intervention to correct a market failure in a market of your choice
- Explain in words why subsidies result in deadweight loss
- Under what circumstances would a tax generate a lot of government revenue?
Under what circumstances would a tax result in a significant decrease in the quantity of the good consumed?
Under what circumstances would a subsidy result in a significant fall in price for the consumer?
Under what circumstances would a subsidy result in a significant increase in price for the producer?
Under what circumstances would a subsidy result in a significant increase in the quantity of a good consumed?
what is a minimum price?
price set by the government to prevent the market price from falling below a certain level; also known as a price floor
give reasons why a government may wish to put a minimum price on a product
- to support the incomes and jobs of producers and encourage investment and innovation
- to discourage consumption of goods that are bad for social welfare
- to prevent consumers abusing any monopsony power they have at expense of suppliers
does an unguarunteed minimum price cause a shortage or a surplus?
surplus
if an unguaranteed minimum price is imposed, does a firm’s revenue increase or decrease?
depends on the elasticity
what is a guaranteed minimum price?
a legal price floor where the government buys up the surplus
if a guaranteed minimum price is imposed, does a firm’s revenue increase or decrease?
increase
give a benefit of guaranteed minimum prices over unguaranteed minimum prices
certainty for producers
give a disadvantage of guaranteed minimum prices over unguaranteed minimum prices
cost for government
what is a maximum price?
the govenment or an industry regulator can set a maximum price to prevent the market price from rising above a certain level; also known as price ceiling
give reasons why a government may wish to put a maximum price on a product
- to make necessities more affordable; reduce poverty/hardship
- to encourage consumpton of merit goods
- to prevent businesses profiteering at the expense of consumers
what is a tradeable pollution permit?
where the government gives firms a permit which allows them to produce up to a set amount of carbon each year
explain the benefits of tradeable pollution permits
- makes the polluter pay and internalises the externality
- incentives the firms to lower their emissions and for consumers to change their behaviour
- revenue generated can be spent on other envirnmental initiatives
explain the disadvantages of tradable pollution permits
- problems determining the size of the tax
- demand may be price inelastic so tax may have little impact on pollution
- could cause a loss of international competetiveness
- could be regressive
- rise of tax evasion
- countries may ‘free ride’
- Explain 3 reasons why the government might want to provide goods
- Explain 2 disadvantages of state provision
- Explain a benefit of information provision
- Explain 2 disadvantages of information provision
what is (‘command and control’) regulation?
a set of rules, normally imposed by government, that seeks to modify or determine the behaviour of firms or organisations
- What forms might regulation take?
explain the benefits of regulation
- can ensure consideration of externalities
- prevents exploitation of consumers
- keeps consumers fully informed
- helps overcome market failure
explain the disadvantages of regulation
- laws may be expensive to moniter, incuring an opportunity cost
- compared to tradable pollution permits, regulation is less efficient method of reducing pollution
- government can suffer regulatory capture
- firms may pass on costs to consumers
- excessive regulation may reduce competition in the market
what is meant by ‘government failure’?
when government intevention in the market leads to a misallocation of resources and a net welfare loss
give the causes of government failure
distortion of price signals
unintended consequences
excessive administartion costs
information gaps
