Chapter 3 Government intervention in the micro economy Flashcards
What is tax ?
a levy imposed upon a taxpayer by a govt organisation in order to fund govt spending and various public externalities
Four canons of taxation
Equity (should be charged according to the ability to pay)
Efficiency (should be inexpensive to collect)
Certainty (taxpayer should how much tax he/ she is to pay)
Convenience (should be paid when suitable to taxpayer)
What is direct tax ?
imposed on people and borne by the same person
e.g. income tax, corporation tax, inheritance tax and stamp duties
What is indirect tax ?
Imposed on goods and services, borne by someone else
e.g. value added tax, customs duties, excise duties, petroleum revenue tax and motor vehicle duties
How to correct market failure from externalities ?
Internalise external benefits and costs to ensure that those who create externalities include them when making decisions
examples of environmental taxes
landfill tax, congestion charge, plastic bag tax and vehicle excise duty (VED)
what is the purpose of income redistribution ?
to achieve a fairer distribution of income so that the gap between the rich and poor is narrowed
types of tax rate
progressive, regressive and proportional/ flat
Govt intervention in addressing neg ext in production/ consumption
impose a tax which is equal to the external cost, supply curve will shift to the left due to increase COP
Problems with environmental taxes
- Assigning the right level of taxation
- consumer welfare effects
- employment and investment consequences
What is subsidy ?
A payment to producers by govt to reduce COP and to increase output of a good or service
Types of producer subsidy ?
- a guaranteed payment on the factor cost of a product
- an input subsidy
- govt grants
- bail
- financial assistance
Govt intervention in addressing pos ext in consumption/ production
provide subsidy which is equal to the external benefit, supply curve shifts to the right due to decreased COP
The vertical distance between two supply curves represents
the amount of tax imposed/ subsidy given
Advantages of subsidy ? (five)
- keep prices down and control inflation
- encourage consumption of merit goods
- reduce the cost of capital investment projects
- slow down the process of long term decline in an industry
- boost demand for industries during a recession
- helps poorer families
- encourage ppl to invest in new sectors
- protect jobs in the loss making industry
- more affordable healthcare industry
- lower cost of training and employing younger workers
- achieve a more equitable income distribution
- lower down some of the external costs of transport
- encourage the arts and other cultural services
Economic arguments against subsidies
- lead to distortion of free market
- arbitrary assistance
- financial cost in the long run
- who pays and who benefits
- encourage inefficiency
- risk of fraud/ corruption
- there are alternatives present
Direct provision
govt control the supply of public goods instead of letting private sectors to produce
Aim: to overcome the free rider problem
Three types of market-oriented environmental policies
pollution charges, marketable permits and better defined property rights
What is marketable pollution permit ?
an approach to reach the capped level of production
When the cost of reducing pollution< cost of buying permits, what will happen ?
The firm would invest in green tech and sell their permits
What is property right ?
The ability of an individual to own and exercise control over scarce resources
Extending property rights can
internalise the externalities created due to unfully allocation of resources
Advantages of extending property rights
- govt doesn’t have to access the value of the property
- transfer of resources to polluters
- those who suffer will receive compensation
Disadvantages of extending property rights
- govt may not have the ability to extend
- extend within a nation’s border can be diff
- diff for the owner to access the value of the property
Challenges of PR
- can’t be efficiently distributed
- enforcement needs cost
- equity- hard to determine who gets the right
Law and regulation
limit the amt of neg ext produced, increase the amt of pos ext produced
Regulations limit/ prevent
demerit goods, goods with neg ext, abuse of monopoly power, exploitation of labor
Problems which regulators of markets/ individuals may face
- hard to find evidence of anti-competitive behavior
- fear of fines and other control
- lack of regulator power & resources
Why it is hard to find evidence of anti-competitive behavior
lack of spoken/ written evidence
conflicting/ asymmetric info
complex info
conflicting evidence (market forces/ collusion in an oligopoly)
Information failure occurs when
ppl have inaccurate, incomplete, uncertain/ misunderstood data and so make potentially “wrong” choices
Causes of imperfect info:
- misunderstanding abt the true cost/ benefits
- uncertainty abt the true cost/ benefit
- too complex info (specialist products)
- inaccurate/ misleading info
- addiction
- lack of awareness
Ways govt uses to tackle info failure
compulsory labelling, improved nutritional info, anti speeding TV advertising to reduce road accidents, advertising campaigns, info campaigns, industry standards/ guarantees for selling used products
What is govt failure ?
cost of intervention > benefit of intervention
a dampening market failure/ a new failure arising despite precautions taken
Causes of govt failure
a) political self interest/ lobbying
b) info failures/ policy decisions made based on imperfect info
c) policy myopia
d) regulatory capture
e) disincentive effect
f) government intervention and evasion
g) costs of administration and enforce
