Chapter 4 Government Intervention Flashcards
Indirect Taxes
Indirect taxes are imposed on spending to buy goods and services. They are paid partly by consumers, but are paid to the government by producers (firms), and for this reason are called ‘indirect’
Excise Taxes
Imposed on particular goods and services, such as petrol (gasoline), cigarettes and alcohol
Direct Taxes
Direct taxes involve payment of the tax by the taxpayers directly to the government
Specific Taxes
A fixed amount of tax per unit of the good or service sold; for example, €5 per packet of cigarettes.
Ad Valorem Taxes
A fixed percentage of the price of the good or service; the amount of tax increases as the price of the good or service increases
Welfare Loss
Represents welfare benefits that are lost to society because resources are not allocated efficiently
Tax Incidence
The burden of a tax that is distributed among consumers and producers. Distribution of the incidence, or who has a larger burden and who has a smaller burden, depends on the price elasticity of demand and price elasticity of supply for the good being taxed.
Price Controls
Refer to the setting of minimum or maximum prices by the government (or private organizations) so that prices are unable to adjust to their equilibrium level determined by demand and supply
Subsidy
Refers to assistance by the government to individuals or groups of individuals, such as firms, consumers, industries or sectors of an economy
Price Ceiling
It means that the price that can be legally charged by sellers of the good must not be higher than the legal maximum price.
Non-price rationing
Once a shortage arises due to a price ceiling, the price mechanism is no longer able to achieve its rationing function. The good is then distributed through factors other than price. For example: first-come-first-served, coupons, and favouritism
Underground Markets
Involve buying/selling transactions that are unrecorded, and are usually illegal. In the case of price ceilings, they are a special kind of price rationing. they involve buying a good at the maximum legal price,
Price Floor
The price that can be legally charged by sellers of the good must not be lower than the price floor, or minimum price
Price Supports
One method governments use to support farmers’ incomes is to set price floors for certain agricultural products, the objective being to raise the price above their equilibrium market price
Minimum Wage
determine the minimum price of labour (the wage rate) that an employer (a firm) must pay
