2.11 government intervention to target market failure Flashcards
what is an indirect tax?
taxes on expenditure, they increase the production costs so producers supply less and demand contracts
what are the two types od indirect tax?
ad-valorem - a percentage of the price, e.g 20% VAT
specific tax- tax per unit e.g 58p per litre on unleaded petrol
what is the incidence of tax?
the tax burden- who pays what
where does the consumer burden lie on a tax diagram?
at new equilibrium price, to old equilibrium price, ending at new equilibrium.
where does the producer burden lie on a tax diagram?
from old equilibrium price to where new equilibrium hits the old supply curve
what does an inelastic demand curve mean for the tax burden?
the more inelastic, the higher the tax burden for the consumer as they are able to pass this on as a higher price for consumers.
what are the evaluating arguments for indirect taxes?
-unintended consequences?
- does it actually work?
- is the tax revenue substantial enough?
-how is the revenue used?
-loss of jobs?
- less investment therefore higher costs of production and lower productive efficiency
-less competition?
- is the tax fair?
- is the tax regressive?
what is a subsidy?
a payment from the government to a producer to lower their costs of production, encouraging them to produce more. this does not need to be paid back.
what does a subsidy encourage?
production of a good as it lowers firms costs
the consumption of merit goods (the full social benefit)
what will a subsidy do to a supply curve?
pushes it out, lowering price and increasing output.
what are the evaluating arguments for subsidies?
-does it achieve its desired stimulus?
- are other incentives also needed?
-positive spillovers?
- do firms become dependent?
-self financing by increasing tax revenue?
-extra burden for tax payers?
-unintended consequences?
what is a maximum price?
a price set below the free market price.
why would a government set a maximum price?
to encourage consumption or production of a good so it does not become too expensive.
what are the disadvantages of a maximum price?
-shortages
- encourages black markets and arbitrage
- queues
-the market becomes less profitable for firms.
- firms may raise prices of other goods
therefore, it may benefit some consumers- those whom are able to get the good.
what are the reasons for setting a maximum price?
- to reduce monopoly exploitation
- to make the good affordable for essential living
what is a minimum price?
a price above the free market price to discourage consumption or production.
e.g on alcohol and minimum wage
what are the disadvantages of a minimum price?
- excess supply/surplus
-black market - people switch to alternatives e.g drugs
-firms may fail
-deters firms from entering market so there is less competition.
what are the reasons for setting a minimum price?
- to protect producers earnings
-to create a surplus to be stored
-to guarantee a level of earnings - to reduce consumption of a demerit good.
what is a buffer stock system?
where both a minimum and maximum price is set and prices can fluctuate between them.
what happens if price is too high in a buffer stock system?
the government will sell the stocks, increasing supply and therefore lowering price.
what will happen if price is too low in a buffer stock system?
the government will buy up the good and store it for future needs. this will decrease supply, increasing price.
what are the advantages of a buffer stock system?
- farmers are protected from volatile prices due to weather and commodity trading.
-lower risk of extreme poverty for the poorest consumers
-macroeconomic stability
-self financing
what are the disadvantages of a buffer stock system?
- may not be large enough to influence price
- expensive therefore an opportunity cost
-goods may be perishable
-rising surplus - better long run alternatives e.g diversifying the market
what is regulation?
- laws banning consumption and production or creating a standard.
e.g buying alcohol under 18 or staying in education until 18
how may regulation discourage a firm?
- heavy fines and penalties
-higher costs
what are the evaluating arguments for regulation and legislation?
- there is a time lag before law is passed and implemented
- cost of enforcement and opportunity cost
-hard to set a quota and target
-too lax or too tight
-penalty needs to be large enough so the fine needs to be greater than the external cost. - does not raise revenue
- inefffective in one country in isolation
what is a tradable pollution permit?
an allowance for firms for pollution in certain industries.
they are able to sell and trade these permits.
what are the advantages of tradable pollution permits?
- benefit environment in the long run
-raise revenue for government
-raises revenue for less polluting firms which they may use to reinvest into greener energy.
what are the disadvantages of tradeable pollution permits?
-relocation of firms
- pass on higher costs to consumers
-competition restricted as these permits are a barrier to entry
- expensive to monitor
-hard to know how many to giver out
-hiding pollution
-hard to measure
-richer buy up from the poorer firms/ countries
-demand for pollution is often inelastic
why should a government provide public goods?
- as they may be under provided but have external benefits and/or are a merit good. providing it makes it more accessible for consumption.
-improves affordability
what are the negatives of state provision of public goods?
- inneficency
- the government may become a monopoly provider
- expensive and incurs a opportunity cost.
what is a public/private partnership?
collaboration between a government and a private sector company that can be used to finance, operate and build projects.
what are the benefits of a public/private partnership?
-faster completion time
-better funding so increased quality
-return on investment larger
- risks are appraised
what are the disadvantages of a public/privte partnership?
- increase government cots
-limit competition
-profits can vary - the government may have info failure and have not enough information to deliver the project on their behalf.
what is provision of information?
when the government provides information where there is gaps so society can make decisions that are best for society as a whole.
what are the causes of government failure?
-distortion of price signals(inefficient allocation of resources)
- unintended consequences
-information gaps e.g the mad cow disease in the uk
-excessive administration costs
what is the difference between government spending and government expenditure?
government expenditure is the public sector spending on things with a related output e.g public sector wages
government spending is government expenditure + transfer payments (e.g benefits)
