1.5.2 Government Intervention & Failure Flashcards
What are methods of government intervention? ( there’s 3 on here)
- Regulations & legislation
- Indirect taxation
- Grants & subsidies
What does it mean by regulation & legislation
laws to ban consumers from consuming a good. While also making it illegal not to do something
What are indirect taxes
Taxes on expenditure
What are Ad valorem taxes
Percentages
E.g. VAT ( adds 20% of the unit price)
What are specific taxes
A set tax per unit
What does internalises the externality mean
The polluter of a demerit good pays for the damage
What does a subsidy mean
A payment from the government to a producer to lower their costs of production & encourage them to produce more
Causes of government failure? ( there’s 5)
- Distortion of price signals
- Unintended Consequences
- Excessive administrative costs
- Information gaps
- Government failure in various markets
What does it mean by distortion of price signals?
Government subsidies could distort price signals by distorting the free market mechanism
What does it mean by unintended consequences
The actions of producers/ consumers have unexpected, or unintended, consequences
What does it mean by excessive administrative costs
The social benefits of a policy might not be worth the financial cost of administering the policy
What does it mean by information gaps
Some polices are decided w/o perfect information
What does it mean by government failure in various markets
Governments buy up harvests during surpluses, then sell the goods onto the market when supplies are low
As there’s more spending what happens to the demand curve
Shifts to the right
