1.4.1 Government Intervention Flashcards
How does Indirect Taxation fix an externality?
Increases costs for producers, they pass on price to consumer, prices rise, suppliers supply less.
What are the advantages of Indirect Taxation as govt intervention?
Internalises the externality
It raises government revenue
What are the disadvantages of a indirect tax to fix an externality?
Tax has to be perfect to completley internalise the externality - difficult to find this.
Could lead to the creation of a black market.
Politcally unpopular.
Regressive in nature.
How do subsidies solve positive externalities?
Subsidies shift supply rightwards as it lowers cost of production.
If its perfect, it will produce the socially optimum level at a lower price.
What are the negatives of subsidies?
- Create a reliance on them (difficult to remove)
- Cost lots - Opp Cost
- Subsidies can cause inefficiency
- Difficult to target and make “perfect”
Why must a maximum price be set below the equilibrium?
A maximum price must be set below the equilibrium price because only then does it actually prevent sellers from charging the market price and force them to sell at a lower price.
What is a maximum price?
Price ceiling -
Legally imposed price that sellers cannot charge above. They are often set on merit goods. For instance, on NYC apartments.
What are the pros and cons of a maximum price?
They can increase positive externalities, they ensure goods that often “merit” to be affordable. This can reduce poverty / reduce inequality.
However, it can distort price signals as it creates excess demand questioning where goods should be allocated. It is also difficult for governments to know where to set the prices.
What is a minimum price?
A legally imposed price at which the good cannot go below. They are often set on goods with negative externalities so that the price is raised and consumption decreases.
Scotland has a minimum price on alcohol of 65p per unit
What are the pros and cons of a minimum price scheme?
Reduce negative externalities, ensure producers get a fair price. This could reduce poverty and inequality.
However, it creates excess supply, this leads to questions about what to do with the surplus goods. It is also difficult for the government to know where to set the prices
What are tradeable pollution permits?
This permit allows the owner to pollute up to a specific amount of pollution and the government controls how many permits there are so limits the maximum amount of pollution.
Companies have to buy permits, and so in order to cut costs, they are incentivised to use greener technology.
Companies exceeding their supply will face legal action.
As there is a fixed supply, increased demand will lead to an increase in price further incentivising firms to use greener tech.
Advantages of Tradeable Pollution Permits?
Since the government caps the number of permits, it is guarenteed that pollution will not rise.
The government also raise a revenue doing this (sell permits, fining exceeders)
Encourages greener tech
Disadvantages of Tradeable Pollution Permits?
Can be expensive to monitor and police. Fines need to be big enough to mitigate firms ignoring the permits.
Raises costs for businesses -> passed onto consumers.
Difficult to know how many permits to provide in the first place.
What is state provision of public goods?
Public goods are non excludable and non rivalrous and so the free rider problem says they will be underprovided for in the FM.
This means, through tax, the govt supplies these, often they are merit goods.
Advantages of State provision?
Corrects market failure by providing important goods -> improves social welfare.
Brings equality.
Positive externalities.
Disadvantages of State provision?
Expensive - High opp cost.
Since the market is not involved, the government might produce the wrong combination of goods as consumers can not indicate their preferences.
The govt may be inefficient as they have little incentive to cut costs.
Corruption / conflicting objectives.
What is provision of infomation?
Where there is asymmetric infomation, the government provides infomation to allow people to make informed decisions. They may also force companies to provide infomation.
I.e Traffic Light systen
Advantages of infomation provision
Helps consumers act rationally
Negatives of infomation provision
Expensive, consumers may not listen, the government might not always have perfect infomation to provide themselves.
What is regulation?
Governments impose laws / caps to ensure levels are set where MSB = MSC (socially optimum) or to ensure that companies provide full infomation on products.
These ensure firms follow regulation and do not exploit their customers or take advantage of market position.
What are the advantages of Regulation?
Ensure consideration of externalities, prevent exploitation of consumers and keep consumers fully informed. This will help to overcome market failure and maximise social welfare.
What are the disadvantages of Regulation?
Can be expensive to implement and monitor = OPP COST.
Firms may pass on costs to consumers.
Can reduce competition in the market and efficiency.
