Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Microeconomics > 2.11 Government Intervention > Flashcards

2.11 Government Intervention Flashcards

1
Q

Why do governments intervene in the market

A

To correct market failure

For example, they might provide healthcare and education

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are indirect taxes and what do they do

A

They are taxes on expenditure. They increase production costs for producers, so they supply less. This increases market price and demand contracts. They can be used to discourage the production or consumption of cigarettes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the two types of indirect taxes

A

Ad valorem

Specific taxes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are ad valorems

A

They are percentages, such as VAT, which adds 20% of the unit price. This is the main indirect tax in the UK

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Describe what an ad valorem diagram looks like

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Explain the ad valorem diagram

A

The incidence of tax might fall differently on consumers and producers. Producers could make consumers pay the whole tax, but if they feel this would lower sales, they may choose to pay some of the tax.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What does the incidence of the tax depend on

A

The price elasticity of the good. A more price inelastic good wouod mean the consumers might have the larger burden of tax. This should discourage the consumption of the demerit good and reduce negative externalities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is a specific tax

A

A set tax per unit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Describe how a specific tax diagram looks

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What effect does a good with a more inelastic demand have on specific taxes

A

The more inelastic the demand, the higher the tax burden for the conusmer, and the lower the burden of tax for the producer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How can indirect taxes reduce the quantity of demerit goods consumed

A

By increasing the price of the good. If the tax is equal to the external cost of each unit, then the free market equilibrium becomes the socially optimum. This means the polluter pays for the damage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is a subsidy

A

A payment from the government to a producer to lower their costs of production and encourage them to produce more

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What do subsidies encourage

A

The consumption of merit goods. This includes the full social benefit in the market price of the good

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Give an example of a subsidy

A

The government might subsidise recycling schemes so it is cheaper for consumers to recycle waste, which gives positive externalities for the environment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does a subsidy graph look like

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What happens the the supply curve after a subsidy

A

The supply curve shifts to the right

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What on a subsidy graph shows the value of the subsidy per unit

A

The vertical distance between the supply curves

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

When do the consumers and producers gain more from a subsidy

A

Consumers gain more when demand is price inelastic, whilst producers supply more when demand is price elastic

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What are the disadvantages of subsidies

A

The opportunity cost to the government and potentially higher taxes, the potential for firms to become inefficient if they rely on the subsidy and government failure, if they subsidise less efficient industries

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is a maximum price

A

The government might set a maximum price where the consumption or production of a good is to be encouraged. This is so that the good does not become too expensive to produce or consume

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Where do maximum prices have to be set

A

Below the free market price, otherwise they would be ineffective

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What does a maximum price diagram look like

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What do maximum prices prevent

A

They prevent monopolies exploiting consumers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What do maximum prices control

A

They control the market price, but this could lead to government failure if they misjudge where the optimum market price should be

25
Q

What can maximum prices lead to

A

Welfar gains for consumers by keeping prices low, and they could increase efficiency in firms, since they have an incentive to keep their costs low

26
Q

What could a maximum price do to firms profits

A

It could reduce then which could lead to less investment in the long term

27
Q

What is a minimum price

A

Where the consumption ir production of a good is to be discouraged by ensuring the good never falls below a certain price

28
Q

Give an example of where minimum price is used

A

The government might impose a minimum price on alcohol, so it is less affordable to buy

The national minimum wage is another example

29
Q

What do minimum prices reduce

A

They reduce the negative externalities from consuming a demerit good, such as alcohol

30
Q

Where do minimum prices have to be set

A

They must be set above the free market price otherwise they would be ineffective

31
Q

What does a minimum price diagram look like

A
32
Q

Explain a minimum price diagram with the example of a national minimum wage

A

The diagram suggests that a minimum wage leads to a fall in the employment rate. It does depend on what level the wage is set. An inelastic labour demand will mean there is only a small contraction in demand for labour

33
Q

In which market is a buffer stock system usually used

A

This is mainly in agricultural markets, where prices are volitile

34
Q

Why might a government use a buffer stock system

A

In order to smooth out these fluctuations

35
Q

How do the government implement a buffer stock system

A

Governments buy up harvests during surpluses, then sell the goods onto the market when supplies are low

36
Q

Advantages on a buffer stock system

A

Farmer income remains stable because fluctuations are reduced

Benefits rural areas where farming is a main source of income

Increases consumer welfare by ensuring prices are not in excess

37
Q

Disadvantages of a buffer stock system

A

Governments may not have the financial resources to buy up stock

By guaranteeing minimum prices farmers may over produce which can be expensive and damaging to the environment

Storage can be difficult and expensive

38
Q

What are regulations

A

The government might use laws to ban consumers from consuming a good. They could also make it illegal not to do something

39
Q

Give an example of a regulation

A

The minimum school leaving age means young people have to be in school until the age of 16, and education or training until they turn 18.

40
Q

What is a benefit from a regulation on minimum school leaving age

A

There are positive externalities in the form of a higher skilled workforce

41
Q

What are the effects of regulations on firms

A

It could raise costs of firms, who might pass on the higher costs to consumers

Firms which fail to follow regulations could face heavy fines

42
Q

What is a tradeable pollution permit

A

Something that allows firms to pollute up to a certain amount, and any surplus on their permit can be traded

43
Q

What are benefits of tradeable pollution permits

A

They could limit the amount of negative externalities, in the form of pollution, created by industies

44
Q

Advantages on tradebale pollution permits

A

Benefits the environment in the long run by encouraging firms to be greener

Governments can raise revenure by selling permits which can be reinvested in green technology

45
Q

Disadvantages of tradeable pollution permits

A

Some firms may relocate to where they can pollute whitout limits

Firms might pass higher costs of production onto the consumer

Can be expensive for governments to monitor emissions

46
Q

What is state provision of public goods

A

The government could provide public goods which are underprovided in the free market, such as education and healthcare

47
Q

Benefits of state provision of public goods

A

This makes merit goods more accessible, which might increase their consumption and yield positive externalities

48
Q

Drawback of state provision of public goods

A

It could be expensive for governments to provide education, and the government will incur an opportunity cost of spending their revenue

49
Q

What is provision of information

A

By providing information, governments can ensure there is no information failure, so consumers and firms can make informed economic decisions

50
Q

What is government intervention

A

When the government intervenes in a market economy. The market is controlled by both the government and the forces of supply and demand. Governments often provide public goods such as streets lights, roads and the police, as well as merit goods, such as healthcare and education

51
Q

How can government intervention fail

A

Governments can fail when they intervene in markets. They could worsen the market failure already present or a new failure might occur. This results in a net welfare loss to society

52
Q

Advantages of government intervention

A

Might be easier to coordinate resources in times of crisis

Government can compensate for market faikure by reallocating resources

Reduce inequality in society

53
Q

Disadvantages of government intervention

A

Governments fail as they may not be fully informed for what to produce

They may not meet consumer preferences

54
Q

What are the causes of government failure

A

Distortion of price signals
Unintended consequences
Excessive administrative costs
Information gaps

55
Q

What is meant by distortion of price signals

A

Government subsidies could distort price signals by distoring the free market mechanism.

For example, the government may end up subsidising an industry which is failing or has few prospects

56
Q

What is meant by unintended consequences

A

This is when actions of producers and consumers have unexpected, or unintended consequences. With government policies, consumers act in unexpected ways

For example, a policy could be undermined, which could make government policies expensive to implement

57
Q

What is meant by excessive administrative costs

A

The social benefit of a policy might not be worth the financial cost of administering the policy. The government have to consider whether the policy is good value for money

58
Q

What is meant by information gaps

A

Some policies might be decided without perfect information. They may require a full cost-benefit analysis which could be time-consuming and expensive. It is not possible to know every but of information so some assumptions have to be made

Microeconomics (25 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions