5.8 Micro Flashcards
Why do governments intervene?
Correct market failure
Better distribution of income
Achieve the governments macroeconomic objcetives
How do governments influence the allocation of resources?
Public expenditure
Taxation or subsidies
Regulation
How can a government intervene to correct market failure?
Indirect tax
Subsidies
Price controls
State provision
What are the advantages of indirect tax?
Inelastic demand
What are the disadvantages of indirect tax?
Regressive in nature
What are the advantages of subsidies?
Reduces the price of a good
Increase the consumption of merit goods
What are the disadvantages of subsidies?
Opportunity costs
Reliant
What are the advantages of minimum prices?
Guarantees a minimum price and income
Good standard of living
Encourages the production of essential products
What are the disadvantages of minimum prices?
Consumers must pay a higher price, lowering disposable income
Over-production
Reduce international competitiveness
Government failure as people seek cheaper and more harmful demerit goods
What are the advantages of maximum prices?
Without this, some people would not be able to afford certain goods and services
Reduce possibility of exploitation
What are the disadvantages of maximum prices?
Some wants will not be fulfilled, leading to dissatisfaction
Excess demand= Queues, shortages and waiting lists
Black markets
What is state provision?
Where the government intervenes by ensuring the adequate supply of merit and public goods is being produced. This could be by funding them.
What is regulation?
Laws or rules implemented to control or restrict actions of large firms
Used to create competitive markets- lowering monopolies
