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Economics > 2.7 Gov Interventonss > Flashcards

2.7 Gov Interventonss Flashcards

1
Q

What is a reason for government intervention in markets related to market failure?

A

To correct market failure and reduce deadweight loss

Market failure occurs when resources are not allocated efficiently, leading to a loss in economic efficiency.

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2
Q

What are the four common government methods to intervene in markets?

A
  • Indirect taxation
  • Subsidies
  • Price ceilings
  • Price floors

These methods are used to influence the level of production or consumption in the economy.

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3
Q

What is the purpose of government intervention to promote equity?

A

To reduce the gap between the rich and poor

Equity is promoted through laws that protect workers and prevent monopolies.

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4
Q

How does government support poorer households?

A

By providing essential services and financial assistance

This support may include welfare programs and subsidies aimed at low-income families.

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5
Q

What is one way governments earn revenue for public services?

A

Through taxation and privatization

Revenue is also generated from the sales of licenses and goods/services.

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6
Q

What are indirect taxes?

A

Taxes placed on goods and services, collected from consumers by suppliers

Indirect taxes typically aim to reduce the quantity demanded of certain goods.

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7
Q

What is a specific tax?

A

A fixed tax per unit of output

Example: A specific amount charged per pack of cigarettes.

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8
Q

What is a sin tax?

A

A tax on specific goods that are considered harmful, such as tobacco and alcohol

Sin taxes can be either specific or ad valorem.

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9
Q

True or False: Indirect taxes are only paid if consumers make a purchase.

A

True

This contrasts with direct taxes, which are taken directly from income.

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10
Q

What is the effect of indirect taxes on the supply curve?

A

They shift the supply curve to the left

This reflects an increase in production costs due to the tax.

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11
Q

What is the role of government in supporting key industries in a global economy?

A

To help them remain competitive

This can include providing subsidies and limiting foreign competition.

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12
Q

Fill in the blank: The government aims to reduce the apparent gap between the ______ and ______.

A

[rich] and [poor]

This is a key aspect of promoting equity.

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13
Q

What is the purpose of laws to prevent environmental damage?

A

To protect the environment and promote sustainable practices

These laws can include regulations on pollution and resource use.

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14
Q

What is the difference between direct and indirect taxes?

A

Direct taxes are collected from income, while indirect taxes are levied on goods/services

Direct taxes include income tax, whereas indirect taxes include sales tax.

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15
Q

What is meant by ‘supporting firms’ in the context of government intervention?

A

Providing assistance to key industries to enhance their competitiveness

This often involves financial support and protection from foreign competition.

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16
Q

What is deadweight loss?

A

A loss of economic efficiency that can occur when the equilibrium for a good or service is not achieved

It is often a result of market failure.

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17
Q

What is the effect of a price increase on quantity demanded?

A

A decrease in quantity demanded (from Q0 to Qn)

A significant price increase can force producers to lay off workers.

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18
Q

What type of tax is an ad valorem tax?

A

A tax that is a percentage of the purchase price (e.g., VAT)

VAT stands for Value Added Tax.

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19
Q

How does VAT affect the price of goods?

A

Higher prices result in greater amounts of tax paid by consumers

The more goods/services consumed, the larger the total tax bill.

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20
Q

What happens to the supply curve when VAT is applied?

A

The supply curve diverges from the original supply curve

This reflects the increased cost to consumers due to the tax.

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21
Q

What are the advantages of indirect taxes?

A
  • Raises the price and reduces quantity demanded of demerit goods
  • Reduces external costs of consumption and production
  • Raises revenue for government programs

The effectiveness of the tax in reducing the use of demerit goods depends on the price elasticity of demand (PED).

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22
Q

What are the disadvantages of indirect taxes?

A
  • Many consumers will continue to buy products that are price inelastic
  • May create illegal markets to avoid taxes
  • Producers may lay off workers due to reduced output

The passing on of tax costs to consumers depends on the PED of the product.

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23
Q

What is a producer subsidy?

A

A per unit amount of money given to a firm by the government

This is aimed at increasing consumption by lowering prices, supporting certain industries, or addressing balance of payments deficits.

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24
Q

What are the benefits of subsidies to consumers?

A

Lower prices for goods

Producers keep some of the subsidy and pass the rest to consumers.

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25
Q

What are the disadvantages of subsidies?

A
  • Distorts the allocation of resources
  • Can lead to excess supply and lobbying by powerful business interests

For example, many oil companies receive significant subsidies.

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26
Q

Fill in the blank: The effectiveness of a tax in reducing the use of demerit goods depends on the price ____________ of demand.

A

elasticity

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27
Q

True or False: Indirect taxes can help reduce external costs of consumption and production.

A

True

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28
Q

What is the impact of price elasticity of demand (PED) on tax incidence?

A

It determines how much of the tax is passed on to consumers

If demand is inelastic, consumers bear more of the tax burden.

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29
Q

What is one reason governments might provide subsidies to producers?

A

To support certain industries by helping with production costs

This can also help domestic firms compete more efficiently.

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30
Q

What are price controls?

A

Price controls are used by governments to influence levels of production or consumption.

They can take the form of price ceilings or price floors.

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31
Q

Define price ceiling.

A

A price ceiling is set below the equilibrium price, preventing sales at higher prices.

This is often used to make necessities more affordable for consumers.

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32
Q

What is the effect of price ceilings on supply and demand?

A

Price ceilings create excess demand, leading to shortages.

This occurs because quantity demanded (QD) exceeds quantity supplied (QS).

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33
Q

How do price ceilings affect consumer surplus?

A

Consumer surplus may initially increase for those who can purchase goods, but overall value decreases as many consumers cannot buy the goods.

This results in a reduction in overall consumer surplus.

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34
Q

What is one method of rationing when price ceilings are in place?

A

Methods of rationing include government-issued ration cards or vouchers.

These are used to determine who receives the limited product.

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35
Q

What is the impact of price ceilings on market size?

A

Price ceilings decrease market size, reducing employment opportunities.

This happens because less product is supplied.

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36
Q

What is allocative efficiency?

A

Allocative efficiency is achieved when marginal benefit (MB) equals marginal cost (MC).

Price ceilings eliminate this efficiency.

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37
Q

What is a deadweight loss?

A

Deadweight loss occurs when a price ceiling is imposed, leading to an inefficient allocation of resources.

This results from society not producing enough of the good.

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38
Q

True or False: Price ceilings increase producer surplus.

A

False

Price ceilings typically reduce producer surplus.

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39
Q

Fill in the blank: The condition created by price ceilings is ______.

A

excess demand

40
Q

What happens to consumer surplus when many consumers are unable to purchase goods due to price ceilings?

A

The overall value of consumer surplus in the market decreases.

This is because fewer consumers can access the goods.

41
Q

What is the relationship between price ceilings and the overall supply in the market?

A

Price ceilings lead to a decrease in overall supply.

This results in a lower quantity of goods available in the market.

42
Q

What is the primary reason sellers withhold output from formal markets?

A

To sell on informal or black markets at higher prices than the price ceiling

Sellers may choose this route to meet excess demand.

43
Q

What are examples of price ceilings?

A
  • Health insurance
  • Taxi fares
  • Diapers & baby food
  • Certain prescription drugs

Price ceilings are maximum prices set by the government.

44
Q

What are the advantages of using price ceilings?

A
  • Some consumers benefit by purchasing at lower prices
  • Consumer surplus increases
  • Can stabilize markets during periods of intense disruption

For example, during COVID-19, price ceilings helped manage supply issues.

45
Q

What are the disadvantages of using price ceilings?

A
  • Some consumers cannot purchase due to shortages
  • Producers lose out as prices fall below usual levels
  • Encourages the creation of illegal markets
  • Distorts market forces, leading to inefficient allocation of resources

For instance, price ceilings on housing rentals can create shortages.

46
Q

What is a price floor?

A

A minimum price set above the equilibrium price

Price floors prevent prices from falling to equilibrium levels.

47
Q

What effect do price floors have on supply and demand?

A
  • Creates surplus output
  • Reduces market size due to lower demand

When price is above equilibrium, quantity supplied exceeds quantity demanded.

48
Q

What is allocative inefficiency in relation to price floors?

A

Occurs when the marginal cost of production exceeds the price consumers are willing to pay

This leads to a misallocation of resources.

49
Q

Fill in the blank: Price ceilings can create excess _______ in the market.

A

demand

This occurs when the price is set below the equilibrium.

50
Q

True or False: Price ceilings always benefit producers.

A

False

Producers often lose out due to lower prices.

51
Q

What is the impact of price ceilings on consumer surplus?

A

Consumer surplus increases

This happens as consumers can purchase goods at lower prices than they would otherwise.

52
Q

What might governments do in response to shortages caused by price ceilings?

A

Intervene by supplying the good or service themselves

This is often necessary to meet excess demand in necessity markets.

53
Q

What is the primary reason sellers withhold output from formal markets?

A

To sell on informal or black markets at higher prices than the price ceiling

Sellers may choose this route to meet excess demand.

54
Q

What are examples of price ceilings?

A
  • Health insurance
  • Taxi fares
  • Diapers & baby food
  • Certain prescription drugs

Price ceilings are maximum prices set by the government.

55
Q

What are the advantages of using price ceilings?

A
  • Some consumers benefit by purchasing at lower prices
  • Consumer surplus increases
  • Can stabilize markets during periods of intense disruption

For example, during COVID-19, price ceilings helped manage supply issues.

56
Q

What are the disadvantages of using price ceilings?

A
  • Some consumers cannot purchase due to shortages
  • Producers lose out as prices fall below usual levels
  • Encourages the creation of illegal markets
  • Distorts market forces, leading to inefficient allocation of resources

For instance, price ceilings on housing rentals can create shortages.

57
Q

What is a price floor?

A

A minimum price set above the equilibrium price

Price floors prevent prices from falling to equilibrium levels.

58
Q

What effect do price floors have on supply and demand?

A
  • Creates surplus output
  • Reduces market size due to lower demand

When price is above equilibrium, quantity supplied exceeds quantity demanded.

59
Q

What is allocative inefficiency in relation to price floors?

A

Occurs when the marginal cost of production exceeds the price consumers are willing to pay

This leads to a misallocation of resources.

60
Q

Fill in the blank: Price ceilings can create excess _______ in the market.

A

demand

This occurs when the price is set below the equilibrium.

61
Q

True or False: Price ceilings always benefit producers.

A

False

Producers often lose out due to lower prices.

62
Q

What is the impact of price ceilings on consumer surplus?

A

Consumer surplus increases

This happens as consumers can purchase goods at lower prices than they would otherwise.

63
Q

What might governments do in response to shortages caused by price ceilings?

A

Intervene by supplying the good or service themselves

This is often necessary to meet excess demand in necessity markets.

64
Q

What is a producer?

A

An individual or entity that creates goods or services

Producers supply products to the market.

65
Q

How does a higher price affect consumers?

A

It causes consumers to reduce quantity demanded

Higher prices can lead to decreased consumer surplus.

66
Q

What is producer surplus?

A

The difference between what producers are willing to accept for a good and what they actually receive

Higher prices increase producer surplus.

67
Q

What does DWL stand for in economics?

A

Deadweight Loss

DWL occurs when market inefficiencies lead to a loss of economic efficiency.

68
Q

What is a price floor?

A

A minimum price set by the government that must be paid for a good or service

Price floors can lead to surpluses in the market.

69
Q

What happens to unsold output due to price floors?

A

It can be disposed of or sold on the black market

Unsold goods can lead to inefficiencies in the market.

70
Q

Give an example of a price floor.

A

Minimum wage

Minimum wage laws set a legal wage level above equilibrium.

71
Q

What is the effect of minimum wage on workers?

A

It can benefit workers who find jobs at the higher wage

Workers at the minimum wage level may have more disposable income and improved quality of life.

72
Q

List some potential winners of minimum wage laws.

A
  • Workers finding jobs at minimum wage
  • Increased disposable income
  • Higher quality of life

Some argue that minimum wage can lead to increased overall demand.

73
Q

What are some potential losers of minimum wage laws?

A
  • Higher unemployment
  • Producers worse off due to increased labor costs
  • Higher prices leading to reduced quantity demanded

The impact of minimum wage laws can vary across industries.

74
Q

True or False: There are clear winners and losers with price floors.

A

False

The effects of price floors can vary, with some products benefiting and others not.

75
Q

What is direct provision of services?

A

Government provision of public goods and services to improve equity

Direct provision can address market failures.

76
Q

What are the advantages of price floors in agricultural markets?

A
  • Higher prices for producers
  • Government purchases excess supply

Price floors can stabilize farmer incomes.

77
Q

What are the disadvantages of price floors?

A
  • Costs to government for purchasing excess supply
  • Over-dependence of farmers on government support
  • Potential increase in unemployment

Price floors can lead to market inefficiencies.

78
Q

What are the advantages of minimum wages in labor markets?

A
  • Guarantees minimum income
  • Increases consumption
  • May incentivize productivity

Minimum wage laws can help reduce poverty.

79
Q

What are the disadvantages of minimum wages in labor markets?

A
  • Raises production costs for firms
  • May lead to layoffs if firms can’t raise prices

The introduction of minimum wage can impact employment negatively.

80
Q

What are public goods?

A

Products that are beneficial and usually provided free at the point of consumption

Examples include roads, parks, lighthouses, and national defense.

81
Q

How are public goods funded?

A

Paid for through general taxation

This addresses the free rider problem.

82
Q

What is a disadvantage of public goods?

A

There is an opportunity cost

Free products may lead to excess demand and long waiting times.

83
Q

What is legislation?

A

The process of creating laws

It involves drafting, debating, and enacting laws.

84
Q

What is regulation?

A

The process of monitoring and enforcing laws

It ensures compliance with established rules.

85
Q

True or False: Regulatory agencies require the government to hire more staff.

A

True

This can lead to increased government expenditure.

86
Q

What is the purpose of government regulation?

A

To reduce the external costs of demerit goods

Demerit goods are those considered harmful to society.

87
Q

What is consumer nudging?

A

Using subtle interventions to influence consumer choices while preserving freedom of choice

Based on behavioral economics.

88
Q

What are the advantages of consumer nudges?

A

Cost-effective, preserves freedom of choice, improved public health, better decision making, improved sustainability

Nudging strategies can lead to positive behavioral changes.

89
Q

What is an example of a default option nudge?

A

Organ donation set as the default option unless individuals opt out

This approach tends to increase participation rates.

90
Q

What is framing in the context of government strategies?

A

Highlighting the positive aspects of certain choices

Used in public health campaigns to promote healthy eating.

91
Q

What are incentives and disincentives?

A

Tools used by governments to encourage or discourage specific behaviors

Examples include subsidies for electric vehicles and high taxes on polluting vehicles.

92
Q

How do social norms influence behavior?

A

People’s actions are often influenced by the behavior of others

Public campaigns can showcase positive role models to encourage similar behavior.

93
Q

What is the purpose of feedback and reminders from the government?

A

To help individuals understand and reduce their consumption

Examples include energy usage reports and preventive healthcare reminders.

94
Q

Fill in the blank: The regulation process is often referred to as _______.

A

command and control

It indicates ongoing government intervention.

95
Q

When will producers pass on all the burden of a tax to a supplier

A

When the demand is perfectly elastic or perfectly inelastic

  • most of tax is passed onto consumer

Economics (12 decks)

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