2.7 Gov Interventonss Flashcards
What is a reason for government intervention in markets related to market failure?
To correct market failure and reduce deadweight loss
Market failure occurs when resources are not allocated efficiently, leading to a loss in economic efficiency.
What are the four common government methods to intervene in markets?
- Indirect taxation
- Subsidies
- Price ceilings
- Price floors
These methods are used to influence the level of production or consumption in the economy.
What is the purpose of government intervention to promote equity?
To reduce the gap between the rich and poor
Equity is promoted through laws that protect workers and prevent monopolies.
How does government support poorer households?
By providing essential services and financial assistance
This support may include welfare programs and subsidies aimed at low-income families.
What is one way governments earn revenue for public services?
Through taxation and privatization
Revenue is also generated from the sales of licenses and goods/services.
What are indirect taxes?
Taxes placed on goods and services, collected from consumers by suppliers
Indirect taxes typically aim to reduce the quantity demanded of certain goods.
What is a specific tax?
A fixed tax per unit of output
Example: A specific amount charged per pack of cigarettes.
What is a sin tax?
A tax on specific goods that are considered harmful, such as tobacco and alcohol
Sin taxes can be either specific or ad valorem.
True or False: Indirect taxes are only paid if consumers make a purchase.
True
This contrasts with direct taxes, which are taken directly from income.
What is the effect of indirect taxes on the supply curve?
They shift the supply curve to the left
This reflects an increase in production costs due to the tax.
What is the role of government in supporting key industries in a global economy?
To help them remain competitive
This can include providing subsidies and limiting foreign competition.
Fill in the blank: The government aims to reduce the apparent gap between the ______ and ______.
[rich] and [poor]
This is a key aspect of promoting equity.
What is the purpose of laws to prevent environmental damage?
To protect the environment and promote sustainable practices
These laws can include regulations on pollution and resource use.
What is the difference between direct and indirect taxes?
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.
What is meant by ‘supporting firms’ in the context of government intervention?
Providing assistance to key industries to enhance their competitiveness
This often involves financial support and protection from foreign competition.
What is deadweight loss?
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.
What is the effect of a price increase on quantity demanded?
A decrease in quantity demanded (from Q0 to Qn)
A significant price increase can force producers to lay off workers.
What type of tax is an ad valorem tax?
A tax that is a percentage of the purchase price (e.g., VAT)
VAT stands for Value Added Tax.
How does VAT affect the price of goods?
Higher prices result in greater amounts of tax paid by consumers
The more goods/services consumed, the larger the total tax bill.
What happens to the supply curve when VAT is applied?
The supply curve diverges from the original supply curve
This reflects the increased cost to consumers due to the tax.
What are the advantages of indirect taxes?
- 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).
What are the disadvantages of indirect taxes?
- 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.
What is a producer subsidy?
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.
What are the benefits of subsidies to consumers?
Lower prices for goods
Producers keep some of the subsidy and pass the rest to consumers.
What are the disadvantages of subsidies?
- Distorts the allocation of resources
- Can lead to excess supply and lobbying by powerful business interests
For example, many oil companies receive significant subsidies.
Fill in the blank: The effectiveness of a tax in reducing the use of demerit goods depends on the price ____________ of demand.
elasticity
True or False: Indirect taxes can help reduce external costs of consumption and production.
True
What is the impact of price elasticity of demand (PED) on tax incidence?
It determines how much of the tax is passed on to consumers
If demand is inelastic, consumers bear more of the tax burden.
What is one reason governments might provide subsidies to producers?
To support certain industries by helping with production costs
This can also help domestic firms compete more efficiently.
What are price controls?
Price controls are used by governments to influence levels of production or consumption.
They can take the form of price ceilings or price floors.
Define price ceiling.
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.
What is the effect of price ceilings on supply and demand?
Price ceilings create excess demand, leading to shortages.
This occurs because quantity demanded (QD) exceeds quantity supplied (QS).
How do price ceilings affect consumer surplus?
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.
What is one method of rationing when price ceilings are in place?
Methods of rationing include government-issued ration cards or vouchers.
These are used to determine who receives the limited product.
What is the impact of price ceilings on market size?
Price ceilings decrease market size, reducing employment opportunities.
This happens because less product is supplied.
What is allocative efficiency?
Allocative efficiency is achieved when marginal benefit (MB) equals marginal cost (MC).
Price ceilings eliminate this efficiency.
What is a deadweight loss?
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.
True or False: Price ceilings increase producer surplus.
False
Price ceilings typically reduce producer surplus.
Fill in the blank: The condition created by price ceilings is ______.
excess demand
What happens to consumer surplus when many consumers are unable to purchase goods due to price ceilings?
The overall value of consumer surplus in the market decreases.
This is because fewer consumers can access the goods.
What is the relationship between price ceilings and the overall supply in the market?
Price ceilings lead to a decrease in overall supply.
This results in a lower quantity of goods available in the market.
What is the primary reason sellers withhold output from formal markets?
To sell on informal or black markets at higher prices than the price ceiling
Sellers may choose this route to meet excess demand.
What are examples of price ceilings?
- Health insurance
- Taxi fares
- Diapers & baby food
- Certain prescription drugs
Price ceilings are maximum prices set by the government.
What are the advantages of using price ceilings?
- 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.
What are the disadvantages of using price ceilings?
- 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.
What is a price floor?
A minimum price set above the equilibrium price
Price floors prevent prices from falling to equilibrium levels.
What effect do price floors have on supply and demand?
- Creates surplus output
- Reduces market size due to lower demand
When price is above equilibrium, quantity supplied exceeds quantity demanded.
What is allocative inefficiency in relation to price floors?
Occurs when the marginal cost of production exceeds the price consumers are willing to pay
This leads to a misallocation of resources.
Fill in the blank: Price ceilings can create excess _______ in the market.
demand
This occurs when the price is set below the equilibrium.
True or False: Price ceilings always benefit producers.
False
Producers often lose out due to lower prices.
What is the impact of price ceilings on consumer surplus?
Consumer surplus increases
This happens as consumers can purchase goods at lower prices than they would otherwise.
What might governments do in response to shortages caused by price ceilings?
Intervene by supplying the good or service themselves
This is often necessary to meet excess demand in necessity markets.
What is the primary reason sellers withhold output from formal markets?
To sell on informal or black markets at higher prices than the price ceiling
Sellers may choose this route to meet excess demand.
What are examples of price ceilings?
- Health insurance
- Taxi fares
- Diapers & baby food
- Certain prescription drugs
Price ceilings are maximum prices set by the government.
What are the advantages of using price ceilings?
- 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.
What are the disadvantages of using price ceilings?
- 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.
What is a price floor?
A minimum price set above the equilibrium price
Price floors prevent prices from falling to equilibrium levels.
What effect do price floors have on supply and demand?
- Creates surplus output
- Reduces market size due to lower demand
When price is above equilibrium, quantity supplied exceeds quantity demanded.
What is allocative inefficiency in relation to price floors?
Occurs when the marginal cost of production exceeds the price consumers are willing to pay
This leads to a misallocation of resources.
Fill in the blank: Price ceilings can create excess _______ in the market.
demand
This occurs when the price is set below the equilibrium.
True or False: Price ceilings always benefit producers.
False
Producers often lose out due to lower prices.
What is the impact of price ceilings on consumer surplus?
Consumer surplus increases
This happens as consumers can purchase goods at lower prices than they would otherwise.
What might governments do in response to shortages caused by price ceilings?
Intervene by supplying the good or service themselves
This is often necessary to meet excess demand in necessity markets.
What is a producer?
An individual or entity that creates goods or services
Producers supply products to the market.
How does a higher price affect consumers?
It causes consumers to reduce quantity demanded
Higher prices can lead to decreased consumer surplus.
What is producer surplus?
The difference between what producers are willing to accept for a good and what they actually receive
Higher prices increase producer surplus.
What does DWL stand for in economics?
Deadweight Loss
DWL occurs when market inefficiencies lead to a loss of economic efficiency.
What is a price floor?
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.
What happens to unsold output due to price floors?
It can be disposed of or sold on the black market
Unsold goods can lead to inefficiencies in the market.
Give an example of a price floor.
Minimum wage
Minimum wage laws set a legal wage level above equilibrium.
What is the effect of minimum wage on workers?
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.
List some potential winners of minimum wage laws.
- Workers finding jobs at minimum wage
- Increased disposable income
- Higher quality of life
Some argue that minimum wage can lead to increased overall demand.
What are some potential losers of minimum wage laws?
- 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.
True or False: There are clear winners and losers with price floors.
False
The effects of price floors can vary, with some products benefiting and others not.
What is direct provision of services?
Government provision of public goods and services to improve equity
Direct provision can address market failures.
What are the advantages of price floors in agricultural markets?
- Higher prices for producers
- Government purchases excess supply
Price floors can stabilize farmer incomes.
What are the disadvantages of price floors?
- 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.
What are the advantages of minimum wages in labor markets?
- Guarantees minimum income
- Increases consumption
- May incentivize productivity
Minimum wage laws can help reduce poverty.
What are the disadvantages of minimum wages in labor markets?
- Raises production costs for firms
- May lead to layoffs if firms can’t raise prices
The introduction of minimum wage can impact employment negatively.
What are public goods?
Products that are beneficial and usually provided free at the point of consumption
Examples include roads, parks, lighthouses, and national defense.
How are public goods funded?
Paid for through general taxation
This addresses the free rider problem.
What is a disadvantage of public goods?
There is an opportunity cost
Free products may lead to excess demand and long waiting times.
What is legislation?
The process of creating laws
It involves drafting, debating, and enacting laws.
What is regulation?
The process of monitoring and enforcing laws
It ensures compliance with established rules.
True or False: Regulatory agencies require the government to hire more staff.
True
This can lead to increased government expenditure.
What is the purpose of government regulation?
To reduce the external costs of demerit goods
Demerit goods are those considered harmful to society.
What is consumer nudging?
Using subtle interventions to influence consumer choices while preserving freedom of choice
Based on behavioral economics.
What are the advantages of consumer nudges?
Cost-effective, preserves freedom of choice, improved public health, better decision making, improved sustainability
Nudging strategies can lead to positive behavioral changes.
What is an example of a default option nudge?
Organ donation set as the default option unless individuals opt out
This approach tends to increase participation rates.
What is framing in the context of government strategies?
Highlighting the positive aspects of certain choices
Used in public health campaigns to promote healthy eating.
What are incentives and disincentives?
Tools used by governments to encourage or discourage specific behaviors
Examples include subsidies for electric vehicles and high taxes on polluting vehicles.
How do social norms influence behavior?
People’s actions are often influenced by the behavior of others
Public campaigns can showcase positive role models to encourage similar behavior.
What is the purpose of feedback and reminders from the government?
To help individuals understand and reduce their consumption
Examples include energy usage reports and preventive healthcare reminders.
Fill in the blank: The regulation process is often referred to as _______.
command and control
It indicates ongoing government intervention.
When will producers pass on all the burden of a tax to a supplier
When the demand is perfectly elastic or perfectly inelastic
- most of tax is passed onto consumer
