1E Flashcards
What is Indirect tax
A tax levied on expenditure on G and S
The burden of a tax
How the cost of a sales tax is shared between consumers and producers. i e who pays how much
Polluter pays principle
Where those responsible for pollution should be made to pay the resulting costs.
Indirect tax steps to MF
-Government adds an indirect tax to a good or service.
-Increase MPC
-Decreases supply-producers willing and able to supply less at every price.
-Increase P
-QD contracts
-Quantity traded is closer to socially optimum quantity
-Decrease in OC/OP
-fewer scarce resources are misallocated to the production of the decreased equilibrium quantity. increased AE.
MF reduced
Evaluation of setting an indirect tax
-Difficulties in setting the correct size tax-hard to put a value on externality-so tax can be too small or too large.
-Inelastic PED might mean that consumption is not reduced as much as hoped.
-Tax may be avoided through the black market.
-Regressive taxes may hit consumers on low incomes harder.
-TAxes can be inflationary.
What is a subsidy
A grant given by the government to producers to encourage production of a G or S.
Subsidy steps to MF
- Government provides a subsidy to suppliers of goods/services.
-Decreased production costs
-Increased supply - Decreased P
-Extends QD
-Quantity traded closer to socially optimum quantity.
-UC decreased
-AE increased
-MF reduced.
What is regulation
A rule set down by the government that firms/consumers need to operate within.
What is prohibition
A ban on the sale of a particular good or service
Examples of goods with regulation
Alcohol
overall aim of regulation
To reduce market failure for goods with negative/positive externalities.
Steps to MF eg allowed to drink increased to age of 21
-Government sets the regulation
-Reg=age allowed to buy and drink is increased to 21
-Penalty created to ensure behavior, e.g a fine
-Decreased consumers W and A
-Therefore D curve shifts left
-Reduced negative externalities
-MF reduced
What is maximum price
The highest price that a good can legally be sold at
Aim of maximum price
To encourage consumption by making goods more affordable or to control excessive prices from monopolies.
e.g-Medicine, food, housing
What is minimum price
The lowest price that a good can be legally be sold at
Aims of minimum price
Discourage consumption.
e.g alcohol, labour.
Problems with minimum price
Surplus stock, black markets, inelastic PED for demerit goods means little change in QD
What are pollution permit
A permit that allows the owner to emit a certain amount of pollution and that, if unused or only partially used, can be sold to another polluter.
Pollution permit steps to MF
-Government sets total number of tradeable permits allowing pollution in an industry
- Firms buy permits(or allocated them for free)
-Firms can now only pollute up to the value of their permit.
-There is a penalty top ensure firms do no pollute above permit
-Govt now controls total amount of pollution from indutsyr at an acceptable level.
- -ve externalities from good are controlled.
-OP decreased within market
- Closer to QSO of good
-AE increased in goods market
-MF reduced
What is an information gap
A lack of information about a product resulting in consumers and producers making decisions that do not maximize welfare.
What is information provision
Government delivery of knowledge to consumers/ producers so that they are fully aware of social benefits.
Information provision key steps to decreased MF
-Government provides information about negative externalities linked to a good/service
-Consumers were previsouly unaware of full extent of harm to themselves and society so were overconsuming.
-Consumers can now make fully informed economic decisions and change their behaviour.
-D shifts left
–Decrease in OC
-QD decreases and closer to QSO
- Increase in AE
-Decrease in MF
What is direct provision
Government intervenes in the market and supplies the good/service to consumers
examples of direct provision
national defence, NHS , education, roads
direct provision key steps to MF
-Gov decides that a good has significant importance for society
-However if left to free market, if the good has merit good characteristics, D is too low as it will be undervalued by consumers ( so minimal profit incentive)
-There would be under consumption
-so gov uses funds from tax revenue to provide service directly.
-All consumers can use the good/service for free or at lowered price.
-Consumption of goods with positive externalities and/or extra private benefits is increased.
-Quantity now increased closer to QSO than if free market provision.
-Gov allocates more scarce resources to this good/service, so reduces misallocation as more FOP now used for this higher quantity of the good and increased AE
-MF reduced
What is government failure
A misallocation of resources arising from government intervention that causes a further divergence between MSB and MSC
