1.4.1: Government Intervention In Markets Flashcards
What are the three methods (graphical) that the government uses to intervene in markets?
•Taxes.
•Subsidies.
•Maximum and minimum price.
How does the government intervene with markets with tax?
When a good has negative externalities, tax is used to shift the supply curve to the left, and make the good more expensive. This reduces demand.
How does the government intervene with markets with subsidies?
Subsidies encourage the production of under-consumed goods in a free market. It shifts supply to the right, reducing the price.
How does the government intervene with markets with maximum and minimum price?
Maximum price is set on goods with positive externalities.
Minimum price is set on goods with negative externalities.
What are the two types of indirect tax the government uses to intervene with markets?
-Specific tax.
-Ad valorem tax.
What does this graph represent?
-S2 line.
-MSC line.
-Specific tax.
-Ad valorem tax.
What does this graph represent?
Subsidies.
What does this graph represent?
Maximum price.
What does this graph represent?
Minimum price.
What are advantages of taxes?
-Raises government revenue.
-Alters consumer behaviour in the long term.
-Internalises the externality.
What are advantages of subsidies?
-Welfare is maximised.
-Encourages production of merit goods.
What are advantages of maximum and minimum price?
-Increases social welfare.
-Max prices ensure that goods are affordable.
-Min prices ensure that profit is made.
What are disadvantages of taxes?
-Has little to no effect on the consumption of inelastic goods.
-Leads to the creation of black markets.
-Regressive: the poor spend a higher proportion of income on taxes than the rich.
What are disadvantages of subsidies?
-Subsidies are ineffective with inelastic goods.
-Opportunity cost on government spending.
-Firms that receives subsidies are more likely to be inefficient.
What are disadvantages of maximum and minimum price?
-Leads to the creation of black markets.
-Difficult for governments to know where to set prices.
What are four methods (non-graphical) of government intervention?
•Tradable pollution permits.
•State provision of public goods.
•Provision of market information.
•Regulation.
What is a tradable pollution permit?
A permit that allows the owners to pollute up to a specific amount. The amount of permits are controlled by the government to set a limit on the maximum amount of pollution.
What is state provision of public goods?
The government providing public goods through taxation.
What is provision of information?
The government trying to cut information gaps on goods so that consumers make informed decisions.
What is regulation?
Law imposition that ensures that levels are kept at MSB = MSC.
What are advantages of tradable pollution permits?
-Reduces pollution, maximising social welfare.
-Encourages companies to invest in green technology.
What are advantages of state provision of public goods?
-Encourages equality, so that everyone has access to basic goods.
-Corrects market failure.
What are advantages of provision of information?
-Helps consumers act rationally.
What are advantages of regulation?
-Ensures consideration of externalities.
-Maximises social welfare.
What are disadvantages of tradable pollution permits?
-Raises costs for businesses, which raises costs for consumers.
-Expensive to monitor.
What are disadvantages of state provision of public goods?
-Expensive and represents a high opportunity cost.
-The government provides goods/services without acting on information from market forces (e.g. too few hospital beds).
What are disadvantages of provision of information?
-Expensive and represents a high opportunity cost.
-Consumers may act irrationally.
What are disadvantages of regulation?
-Expensive and represents a high opportunity cost
-Firms may pass costs onto consumers through higher prices.
