3.1 Reasons for government intervention in markets Flashcards
What are the main reasons governments intervene?
- Provide public goods
- Overconsumption of demerit goods
- Underconsumption of merit goods
- Controlling prices in markets
What are the methods of government intervention?
- Taxes
- Subsides
- Direct Provision
- Max and Min Prices
What is a tax?
A compulsory contribution to state revenue, imposed by the government
Why does a government provide public goods?
It won’t be provided due to the free rider problem as firms have profit incentives
Why do governments have to change the provision of merit and demerit goods?
Due to the information gap/failure on merit goods benefits and demerit goods negatives
Would the government set a min or a max price on a merit good?
Minimum Price
Would the government set a min or a max price on a demerit good?
Maximum Price
What is the definition of an indirect tax?
A tax on consumption
What is the definition of a direct tax?
A tax on income
Who pays for tax?
The producer
How does producers pay for taxes effectively?
By putting some of the incidence on the consumer
