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economics hl > 2.7 role of government (government intervention) > Flashcards

2.7 role of government (government intervention) Flashcards

1
Q

purpose of indirect tax

A
  • increasing tax revenue
  • correcting market failure (negative externalities, demerit goods)
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1
Q

main forms of government intervention in markets [6]

A

1) Indirect taxes

2) Subsidies

3) Price control: price ceilings & price floors

4) Command and control regulation and legislation

5) Direct provision of goods and services

6) Nudges (HL only)

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2
Q

examples of the purposes of indirect tax

A
  • increasing tax revenue
    • e.g. onsen hot spring in Japan
  • correcting market failure (negative externalities, demerit goods)
    • e.g. discourage people from using indoor tanning services in US, risks of skin cancer from UV light exposure
    • e.g. tax on junk food in Hungary

e.g. Bachelor tax in South Africa

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3
Q

indirect tax

A

tax imposed on spending (goods & services)

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3
Q

direct tax

A

tax imposed on income, profits and wealth

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4
Q

excise tax

A

an indirect tax on a specific good or service

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5
Q

specific tax

A

a fixed amount of tax per unit of good or service sold

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6
Q

Why does a supply curve shift upwards when as indirect tax is applied?

A

Indirect taxes are paid by the firm to the government

  • Therefore, for every level of output the firm is willing to supply to the market, it must receive a price that is higher than the original price by the amount of tax
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6
Q

Ad Valorem tax

A

tax calculated as a fixed percentage of the price off the good or service

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7
Q

examples of excise tax in HK

A
  • alcohol, petrol, cigarettes, for new cars only in general
    • demerit goods, want to discourage consumption
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7
Q

why impose taxes?

A

1) Government revenue

2) Distribution of income

3) Correcting negative externalities to improve allocative efficiencies

  • e.g. influencing level of production
  • e.g. influencing level of consumption
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8
Q

is tax revenue a loss to society?

A

tax revenue is not a loss to society b/c tax revenue is reinvested into the economy in the form of welfare, education etc.

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9
Q

effect if indirect tax on stakeholders

A
  • Consumers :(
    • CS decrease → price increase & quantity decrease
  • Producers :(
    • PS decrease → price decrease & quantity decrease
  • Workers :(
    • Total revenue decrease ⇒ P1Q1 → P3Q2 → lower production → fire workers (lower COP)
  • Government :)
    • Tax revenue
  • Society :(
    • Deadweight loss, SS decrease due to dwl
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10
Q

what happens to the allocation of resources when an indirect tax is imposed

A

underallocation of resources

  • the society is allocatively efficient when production is at Q0
  • society is being worse off as less goods are produced at Q1
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11
Q

what is the assumption made about a good before government intervention

A

good before government intervention – is at allocative efficiency

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11
Q

Why is there a deadweight loss when the supply curve shifts to the left?

A
  • Assumption → before government intervention, everything allocated most efficiently
  • Q0 → allocative efficiency
  • To measure allocative efficiency: look at the quantity
  • In society: prefer Q0, but now only Q1 → underallocation of resources → misallocation of resources
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12
Q

subsidy

A

financial support to individuals or groups for reducing costs of production

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13
Q

purpose of subsidies [5]

A
  • Increase producer revenue (e.g. agricultural products)
  • Make necessities more affordable
  • Encourage production and consumption of socially desirable/merit goods or services (correcting allocative efficiency) (e.g. vaccinations and education)
  • Support the growth of particular industries (e.g. enterprise support scheme for R&D in HK)
  • Encourage exports
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14
Q

consequence of subsidies to different stakeholders

A

Consumers :)

  • Price decrease :), Quantity increase :) → CS increase
  • CS area: abcgf (old CS: ab) (gain = cgf)

Producers :)

  • Price increase :) (price they receive increases, P2+unit subsidy=P3), Quantity increase :) → PS increase
  • PS area: bcdh = [hij+? (paralellogram)] (old: ch) (gain bd)

Foreign producers :(

  • their prices may be higher than local prices → discouraging people from buying from foreign producers (price includes import fees as well)
  • Not as competitive (as locally produced goods)

Workers :)

  • Producer’s TR increase (b/c P3Q2 > P1Q1)

Government :(

  • Sub expense (increased government expenditure)
  • area: efgbdc (loss = bcdefg)

Society :(

  • deadweight loss
  • producers may become over reliant on subsidy → complacency
    • not good for society → not at allocative efficiency
14
Q

how to find dwl?

A
  • gains from surpluses vs losses from surpluses
  • gain does not exceed the cost by the government (subsidy)
15
Q

what happens to the allocation of resources of the good when a subsidy is imposed?

A

there is an overallocation of resources

  • The society is allocative
  • The society is allocative efficient when production is at Q1
  • Society is being worse off as too many goods are produced at Q2
16
Q

price controls

A

government setting maximum (price ceiling) OR minimum (price floor) price on goods and services

17
Q

price ceiling

A

below equilibrium price, bc equilibrium price too high

price floor: when P is too low

18
Q

price floor

A

above equilibrium price, so producers can receive higher price (e.g. wage)

reduce people’s consumptions → Qd decrease → fix market failure

  • price ceiling: when P is too high
19
Q

tax creates a ___ equilibrium

A

new

20
Q

subsidies creates a ___ equilibrium

A

new

21
Q

price controls creates

A

market disequilibrium

22
Q

effect of price ceiling on different stakeholders (with NYC 1947 rent control/price ceiling example)

A
  • Consumers :(
    • Price decrease :) , quantity decrease :( → CS is uncertain
    • Enjoy cheaper houses (price decrease, P1→Pc), rich people abused the system, encourages illegal business activities (e.g. black market) ⇒ shortage
      • e.g. bc quantity decrease, some people will bribe landlords to get the housing → creates a black market
      • at Qs → rich politicians/celebrities → lucky people
      • at Qd → other people → have to pay a higher price
  • Producers :(
    • Price decrease :(, quantity decrease :( → PS decrease
    • Revenue decreases → production decreases + landlords ignore repairs → quaity of house decreases, encourages sub-divided houses
      • compare P1Qs to P1Q1 → smaller
  • Workers (construction) :(
    • Production decreases → losing jobs
      • generally same as producers (if producer :( workers also :( !!)
  • Government :/
    • It depends: may get political popularity or not
    • who would support the government? = rich people, people in Qs
    • who would not support the government? = people in Qd
  • Society :(
    • Inefficiency → DWL
      • consumers: misallocate resources to the black market
      • producers: not allocating resources efficiently → decrease production and ignore repairs
23
Q

consequence of price ceiling on the economy

A
  • Shortage
  • Non-price rationing
    • e.g. lines, coupons, favouritism
  • Underground (parallel) markets (i.e. black market)
  • Welfare loss (allocative inefficiency → underallocation of resources)
24
Q

What can the government do about the shortage? (i.e. of housing)

A
  • increase supply → cause a shift
  • can provide more housing
25
Q

Why is there DWL?

A
  • something will disrupt allocative efficiency (e.g. price ceiling)
  • try to fix one problem caused by one government intervention with another government intervention
  • causes DWL
  • continuous cycle
26
Q

stakeholders

A

are parties that have interest on the economic activities who can affect or be affected by the outcome of the economic activities

27
Q

common reasons for price floor [2]

A
  • Provide support for primary products (resource market)
  • Protect low-skilled, low wage workers (labour market)
28
Q

Why are farmers incomes often unstable and low?

A
  • Low PED and PES (big price fluctuations) → inelastic
  • Low YED (no big changes in consumption)
  • Price floor creates a surplus :( — what can the governments do to the surplus in the case of agriculture products? (e..g milk, potato, wheats)
    • governments can subsidise consumers
    • governments can buy the surplus → government may buy the excess supply
29
Q

Government measures to dispose of surplus (from price floor after they purchase the surplus)

A
  • store the surplus
    • export the surplus
    • use as aid and send to developing countries
30
Q

what is a problem created when the government tries to dispose of surplus?

A

other countries may see it as dumping → selling at low prices

31
Q

consequences of government purchase (of surplus caused by price floor) to different stakeholders

A
  • Consumers :/
  • Producers :)
    • b/c government buy surplus → quantity increase
    • higher revenue
  • Workers :)
    • firm has higher revenue, possibly higher pay for workers
  • Government :(
    • higher government expenditure
  • Foreign consumers :)
    • cheaper prices
  • Foreign producers :(
    • reduced competitiveness due to higher prices
    • dumping → goods being sold at low prices
32
Q

direct provision of services

A

Many public goods and services improve the lives of a country’s population

Governments often provide services to improve the level of equity e.g. healthcare services ensure everyone can access the same medical treatment

33
Q

what does state provision of public goods/services refer to?

A

Public goods are beneficial for society and are not provided by private firms due to the free rider problem

Examples include roads, parks, lighthouses, national defence

34
Q

disadvantages of direct provision

A

Paid for through general taxation

There is an opportunity cost associated with their provision

Products which are free may result in excess demand and long waiting times e.g. procedures at Public hospitals

34
Q

advantages of direct provision

A

They are usually provided free at the point of consumption

Accessible to everyone regardless of income

Usually provide both private and external benefits to society

35
Q

legislation

A

Legislation is the process of creating laws

36
Q

regulation

A

regulation is the process of monitoring and enforcing the laws

37
Q

does legislation and regulation involve ongoing government intervention?

A

yes

The use of legislation and regulation are referred to as command and control as it involves ongoing government intervention

38
Q

what does legislation and regulation involve?

A

Governments create rules (laws) to limit harm from the external costs of consumption/production

They often create regulatory agencies to monitor that the rules are not broken

39
Q

advantages of legislation and regulation

A

Individuals or firms may be fined/imprisoned for breaking the rules e.g. selling cigarettes to minors is a punishable offence

They help to reduce the external costs of demerit goods

Fines can generate extra government revenue

40
Q

disadvantages of legislation and regulation

A

Enforcing laws requires the government to hire more people to work for the regulatory agencies

Enforcing laws can be difficult as it is a complex process to determine if firms/consumers are breaking the laws

The regulation may create underground (illegal) markets which could generate even higher external costs on society

economics hl (8 decks)

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