AL Government Microeconomic Intervention Flashcards
Indirect taxes
Imposed by the government and they increase production costs for producers. Therefore producers supply less. This increases market price and demand contracts. Shown by the vertical distance between two supply curves
Ad valorem taxes
Percentages of the unit price. The absolute value of the tax increases as the price of the good increases causing the supply curve to pivot. If demand is inelastic, government revenue is higher.
Specific taxes
A set tax per unit
The burden of tax with different PEDs
If demand is more elastic, the incidence of the tax will fall mainly on the supplier
If demand is more inelastic, the incidence of the tax will fall mainly on the consumer
When demand is perfectly inelastic or supply is perfectly elastic the incidence of the tax falls wholly on the consumer
Disadvantages of taxes
If implemented with the intention of internalising the externality it is hard to put a monetary value on the externality
Taxes could be expensive for the government to collect
Some could be regressive so impact those on low and fixed incomes the most
Could be inflationary
Subsidies
A payment from the government to a producer to lower their costs of production and encourage them to produce more
Shift the supply curve to the right which lowers the market price
The vertical distance between the supply curves shows the value of the subsidy per unit
Government spending on subsidy
Calculated by the value of the subsidy per unit times the output
Advantages of subsidies
Increase output and lower prices for consumers
Increase employment rate by improving skills and lowering costs of employment
Reduce inequality if progressive
Could help control inflation but reducing production costs
Could boost demand during economic decline
Encourages consumption of merit good and positive externalities
LRAS could increase if aimed at capital
If demand is inelastic there will be greater consumer gain because there will be a large effect on price
Disadvantages of subsidies
Could be government failure if the subsidy is inefficient or distorts market price
Government revenue could be better spent elsewhere. Opportunity cost should be considered
Usually the tax payer pays for the subsidy and may not receive a direct benefit
If demand is elastic it will benefit producers more since there will be a large effect on quantity
Producer and consumer subsidies
A consumer subsidy encourages consumers to purchase more of a particular good or service
Consumer subsidies affect demand and do not shift the supply curve
Producer subsidies lower the cost of production and shift the supply curve
Nationalisation
Occurs when private sector assets are sold the the public sector. The government gains control of an industry
Natural monopolies are created because it is inefficient to have multiple
Some yield strong positive externalities
Have different objectives to privatised industries which are mainly profit driven so social welfare might be a priority
Privatisation
Assets are transferred from the public sector to the private sector. The government sells a firm which leaves it to the free market and private individuals
Also covers the deregulation of the market
Gives incentives to operate efficiently which increases economic welfare because they have a profit incentive. Firms also have to produce the goods and services consumers want to allocative efficiently and quality increases. Competition may result in lower prices. Revenue is raised for the government on a one-off basis
Deregulation
Firms can compete in a competitive market which should also help improve economic efficiency
The act of reducing how much an industry is regulated. It reduces government power and enhances competition. Excessive regulation can limit the quantity of output. Excessive taxes might discourage firms earning above a certain level of profit, limiting the size a firm chooses or can grow to
Tradable pollution permit
Could limit the amount of negative externalities created in industries. Firms can pollute up to a certain amount and any surplus on their permit can be traded. Firms can buy and sell allowances between themselves
Advantages of tradable pollution permits
Should benefit the environment in the long run by encouraging green production methods
The government could raise revenue from the permits because they can sell them to firms which can be reinvest in green technology
If firms exceed their permit they have the purchase more permits from firms who didn’t. This raises revenue for greener firms who might then invest in green production methods
Disadvantages of tradable pollution permits
Could lead to some firms relocating to where they can pollute without limits which reduce production costs
Firms might pass higher costs of production onto the consumer
Competition could be restricted if the permits create a barrier to entry
Could be expensive for governments to monitor emissions
State provision of public goods
Government could provide public goods which are under provided in the free market which have external benefits. Makes merit goods more accessible which might increase their consumption and yield positive externalities. Could be expensive for the government and will incur an opportunity cost of spending their revenue
Provision of information
Governments can ensure there is no information failure so consumers and firms can make informed economic decisions. Could be expensive to police
Regulation
The government could use laws to ban consumers from consuming a good or make it illegal not to do something. This has positive externalities. Could be difficult to police and there could be high administrative costs. Bans may cause consumption on the black market. Firms which fail to follow regulations could face heavy fines which acts as a disincentive to break the rule. Could raise costs of firms who might pass on the higher costs to consumers
Property rights
Consumers and producers have a right of ownership of the goods they produce where there are property rights. This encourages entrepreneurship and inventions since ideas are protected. Without these rights markets become inefficient. Resources could be over-exploited or misused which can lead to market failure
Behavioural insights and nudge theory
Consumer behaviour can influence government policies. These may not be traditional and could be more effective for dealing with economic issues. Nudges aim to change the behaviour of consumers without taking away their freedom of choice under the category of choice architecture. Can be argued that they are manipulative and consumers do not get a free choice. Due to imperfect information they can help prevent consumers making irrational or poor choices so welfare is maximised
Efficiency vs equity
Efficient is how resources can be best used in society. A market is efficient when resources are distributed optimally
Equity is fairness or what is considered to be an acceptable distribution of income and wealth in society. This could be subjective
Price stabilisation
Important for consumers since high inflation or deflation can be damaging. Those on low and fixed incomes are hit hardest due to regressive effect because the cost of necessities become expensive. The purchasing power of money falls. If consumers have loans the value of repayment is lower because the amount owed does not increase with inflation so the real value of debt decreases. Real incomes fall with inflation so less disposable income. If firms face higher costs there could be more redundancies
Transfer payments
Welfare payments from the government. They aim to provide a minimum standard of living for those on low incomes. No goods or services are exchanged. They help reduce the level of inequality in society.
