3.2 Methods and effects of government intervention in markets Flashcards
Whats the definition of Indirect Tax?
A tax imposed on goods and services rather than on income or profits.
What are the two types of Indirect Taxes?
Specific tax & Ad Valorem tax
What is a specific indirect tax?
A fixed tax on the amount per unit eg. 5$ Tax on all alcohol
What is a ad valorem specific tax?
A tax set by the percentage of price eg. 20% Tax on all alcohol
What is the effect of the imposition of an indirect tax on the Supply Curve?
Indirect tax shifts supply curve left/upward.
What is the Consumer Burden of an indirect tax?
Portion of tax paid by consumers in the form of higher prices.
What is the Producer Burden of an indirect tax?
Portion of tax absorbed by firms, reducing profit margins.
How does the Elasticity effect the tax burden?
If demand is inelastic, consumers bear more tax; if elastic, producers bear more.
The Effect of an subsidy on the Supply Curve?
Subsidies shift supply curve right/downward.
How does the Elasticity effect the subsidy burden?
If demand is inelastic, consumers benefit more; if elastic, producers benefit more.
Definition of Direct Provision
When the government supplies goods/services instead of the private sector.
Reasons for Government Provision
Correct market failure, equity, external benefits.
What is provision of information in terms of demerit goods?
Provision of information for demerit goods will likely lead to a fall in demand
Whats the definition of a Maximum Price
A legal upper limit on price below the equilibrium point
Effects of Maximum Prices
Shortages, black markets, bribery
Whats the definition of a Minimum Price
A legal lower limit on price above the equilibrium point
Effects of Minimum Prices
Surpluses, inefficiencies, potential waste.
When would there be a Minimum Price set(Aside from demerit goods)
Agricultural price supports
Definition of Buffer Stock Scheme
A system where the government stabilises prices by buying/selling stocks typically after the imposition of max and min prices
How do Buffer Stocks Work?
Government buys the excess supply in times during high supply, sells during shortages when there is excess demand
Benefits of buffer stocks
Stable income for farmers, price stability for consumers.
Challenges of buffer stocks
High storage costs, risk of financial unsustainability
