6.2 Government intervention Flashcards
Why do governments intervene in markets?
To correct market failure
What are the 2 taxes governments can use to alter supply?
Specific or unit tax - these involve a fixed amount being added per unit of a good or service, such as bottles of alcohol
Ad valorem taxes - adding a percentage to of the price of a good or service VAT at 20%
What happens to the supply curve when a specific unit tax is added?
Supply shifts left
What happens to the supply curve when an ad valorem or percentage tax is added?
Shifts left and becomes more inelastic
What are the advantages of indirect taxation?
Inelastic demand - high revenues can be gained, can be redistributed to healthcare
Assuming the tax rate is correct it should internalise an external cost - reflecting a negative impact upon price and quantity
Use of price mechanism leaves it up to producers and consumers to adjust their behaviour
What are the disadvantages of indirect taxation?
Inelastic demand - Qd doesn’t fall much unless tax is extremely high - reduces the impact of the tax
Can’t accurately place a monetary value on external costs, makes it almost impossible to internalise a negative externality.
Regressive in nature - take a larger percentage of poorer persons income - seen as unfair
Reduce international competitiveness due to increased costs compared to foreign competitors
What happens to the supply curve when subsidies are used to correct market failure?
Shifts right and becomes more elastic
What type of market failure is caused by implementing a minimum price?
Excess supply
What type of market failure is caused by implementing a maximum price?
Excess demand
What are the potential drawbacks on implementing a minimum price on demerit goods?
Price inelastic products - Means demand will not be affected
Regressive - poorest hit the hardest
Black markets - People could resort to black markets
Set at the right level - if set incorrectly could lead to further market failure
What are the potential drawbacks on implementing a minimum price on demerit goods?
Price inelastic products - meaning the increase in price won’t impact demand
Regressive - poorest hit the hardest
Black markets - people could resort to black markets to access the product
Set at the right level - if set at the wrong level could lead to further market failure
What are the potential drawbacks on implementing a maximum price on merit goods?
Excess demand - Not incentive for producers to supply at the lower price
Black markets - Will form to access the goods
Enforcement - Hard to actually implement in a market
Setting the right level - If set incorrectly could lead to further market failure
