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Economics Theme 1 > 1.4.1 > Flashcards

1.4.1 Flashcards

1
Q

In a free market system what view does the government take?

A

That markets are best suited to allocating scarce resources and allow market forces of supply and demand to set prices.

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2
Q

What is the role of the government?

A

Maintain property rights, uphold the rule of law and maintain the value of the currency.

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3
Q

What is government intervention?

A

When the state gets involved in markets and takes action to try to correct market failure, improve economic efficiency, impact upon the macroeconomic performance of the economy and/or change distribution of wealth and income.

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4
Q

What can the government use when intervening?

A

Regulations
Taxes
Subsidies
Maximum and minimum prices to change price signals
better information/ direct provision

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5
Q

What are types of market failure?

A

-Factor immobility
-Public good
-Negative externalilties and demerit goods
-Positive externalities and merit goods
-Information gaps
-High relative poverty
-Monopoly power in a market

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6
Q

What is the consequence of factor immobility as a type of market failure? And an example of government intervention to tackle it?

A

Structural unemployment
State investment in education and training

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7
Q

What is the consequence of public goods as a type of market failure? And an example of government intervention to tackle it?

A

-Failure of markets to provide pure public goods, free rider problem.
-Government funded public goods for collective consumption

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8
Q

What is the consequence of negative externalities and demerit goods as a type of market failure? And an example of government intervention to tackle it?

A

-Over consumption of products that are ‘bad’ for us/society.
-Information campaigns, minimum age for consumption, indirect taxes

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9
Q

What is the consequence of positive externalities and merit goods as a type of market failure? And an example of government intervention to tackle it?

A

-Under consumption of products that are ‘good’ for us/society.
-Subsidies, better information on private benefits

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10
Q

What is the consequence of information gaps as a type of market failure? And an example of government intervention to tackle it?

A

-Damaging consequences for consumers from poor choices.
-Statutory information/labelling

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11
Q

What is the consequence of high relative poverty as a type of market failure? And an example of government intervention to tackle it?

A

-Low income families suffer social exclusion, negative externalities.
-Taxation and welfare to redistrubute income and wealth.

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12
Q

What is the consequence of monopoly power in a market as a type of market failure? And an example of government intervention to tackle it?

A

-Higher prices for consumers cause loss of allocative efficiency.
-Competition policy, measures to encourage new firms into a market.

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13
Q

What is fiscal policy?

A

The use of government spending and/or taxation can be used to alter the level of demand for different products and the pattern of demand.

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14
Q

How can indirect taxes be used to raise the price of products with negative externalities?

A

Designed to increase opportunity cost of consumption and shift market equilibrium to socially optimal level, causes market supply to decrease,

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15
Q

How do subsidies to consumers lower the price of goods with positive externalities?

A

Boost consumption and output of products, increases market supply and lowers equilibrium price

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16
Q

What are example of taxes?

A

-VAT(value added tax)
-Plastic bag charge
-Fuel duties
-Alcohol duties
-Tobacco duties
-Sugar tax

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17
Q

What are examples of subsidies?

A

-Biofuel subsidies for farmers
-Apprenticeship schemes
-Subsidies for wind farm investment
-Child care for working families
-Subsidies to rail industry

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18
Q

What are fiscal policy intervention?

A

-Indirect taxes
-Subsidies to consumers
-Tax relief
-Changes to taxation and welfare payments

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19
Q

How cant tax relief be used on fiscal policy intervention?

A

Government may offer financial assistance such as tax credits for businesses investment in research and development

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20
Q

How can change to taxation and welfare payments be used as fiscal policy intervention?

A

Can be used to influence the overall distribution of income and wealth.

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21
Q

What is a stakeholder?

A

Any person or organisation that has an interest in a specific project or policy decision.

22
Q

When do stakeholder issues typically come into play?

A

Major infrastructural projects where a cost benefit analysis is undertaken to assess the likely social costs and benefits

23
Q

What are examples of stakeholders?

A

-Employers of a business
-Creditors
-Professional associations
-Suppliers to a business
-Local/national communities
-Shareholders/investors/finaciers

24
Q

What is always the aim of an indirect tax?

A

To internalise a negative externality

25
Q

Why is implementing indirect taxes hard?

A

-Setting the right tax rate
-Cost of collection
-Price inelastic demand
-Redistrubtion effects
-Increased costs

26
Q

What are the arguments for a sugar tax?

A

-External costs of consuming sugary drinks
-Information failures people underestiamte long-term effects of consumption
-Sugar tax raises revenue
-Tax encourages healthier alternatives

27
Q

What are the arguments against a sugar tax?

A

-Regressive on low income families
-Other policies may be more effective
-May switch to cheaper sugary products
-Risk of lost jobs that rely on drink sales
-Producers swapping low-calories sweetners for sugar

28
Q

What are advantages of subsidies?

A

-Greater efficiency
-Subsidise public transport = less drivers = reduce their negative externalities
-Long term help change preferences, encourages firms to develop goods with positive exeternailties

29
Q

When does market failure happen?

A

The price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social welfare loss

30
Q

When does market failure exist?

A

The competitive outcome of markets is not satisfactory from the pov of society

31
Q

When does complete market failure occur?

A

When the market simply does not supply products at all

32
Q

When does partial market failure occur?

A

The market does actually function but it produces the wrong quantity of a product or at the wrong price.

33
Q

What is a maximum price?

A

Legally-imposed maximum price/price ceiling in a market that suppliers cannot exceed.

34
Q

How can a maximum price be effective?

A

If it is set below the existing free market equilibrium price.

35
Q

What type of markets do maximum prices often lead to?

A

Secondary markets developing due to scarcity of supply means that consumers are willing and able to pay above regulated price

36
Q

What type of economic judgement does a maximum price involve?

A

Normative judgement on behalf of the government about what the price should be

37
Q

What is a minimum price?

A

It is a legally impose price floor below which the normal market price cannot fall

38
Q

How can the minimum price be effective?

A

Has to be set above the normal equilibrium price

39
Q

How can a polluter pay principle be implemented?

A

Carbon tax
Cap-and-trade scheme using tradeable permits

40
Q

What is carbon trading?

A

A form of pollution control that uses the market mechansim to change relative prices and the incentives of producers and consumers to reduce their emissions.

41
Q

What is the EU carbon emissions trading scheme?

A

cap and trade system

42
Q

What does the tradeable pollution permit scheme do?

A

Sets a decreasing cap for CO2 from energy intensive industries, then allocates/auctions emissions allowances which can be traded on the open market

43
Q

Why is the carbon cap reduced over time?

A

Higher the price, greater incentive to cut pollution.
Increasing scarcity of permits leads to increase in price

44
Q

What does the UK carbon price floor apply to?

A

Fossil fuels used for electricity generation

45
Q

What is the minimum price for carbon emissions designed to do?

A

Provide a stable carbon price signal as a way of internalising externailties.

46
Q

What are the arguments for a carbon price floor?

A

-Reduces risk and costs of investing in new nuclear capacity
-Reduces carbon price volatility
-Makes low carbon electricity more competitive

47
Q

What are the disadvantages of a carbon price floor?

A

-Better to restrict total supply of carbon permits than to increase market price
-Carbon tax is more effective and raises tax revenues
-Price floor may damage international competitiveness

48
Q

What are the advantages of a carbon tax?

A

-Pollution tax internalises the externality and makes the polluter pay
-Fee on imported goods reduces risk of domestic businesses re-locating to avoid tax
-Raises tax revenue
-May be offsetting tax cuts on unemployment/childcare

49
Q

What are the disadvantages of a carbon tax?

A

-Low price elasticity of demand
-Higher structural unemployment of workers in carbon intensive sectors
-The burden of carbon tax falls heavy on low income families
-Damage competitiveness of domestic businesses in oversea markets

50
Q

What are the arguments for regulation as a way of correcting market failures?

A

-Spur business innovation
-More effective if demand is unresponsive to price changes
-Can be gradually toughened each year (helps stimulate capital investment)
-Straightforward to understand and for business to apply
-Imposed quickly

51
Q

What are the risks/disadvantages from heavy use of regulations in markets?

A

-High cost of enforcement
-Lead to unintended consequences/gov failure
-Cost of meeting regulations can discourage small businesses/less competition
-Tax leads to revenue but regulations is just a cost
-Start illegal trade, increases time/cost of police

52
Q
A

Economics Theme 1 (22 decks)

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