Evon Plus Dal: All Of Government Interventio Flashcards
What is indirect tax?
A tax that can increase a firms cost or production but can be transferred to the consumer as a higher price
Explain how you would show a shift on a negative production externalities graph if there was a tax like carbon taxes imposed
It would be a usual negative production externalities graph
You would shift the MPC curve to the left to show
- Rising prices
- New equilibrium at Qsoc
MSC=MPC
What does a tax increase for a firm?
Cost of production
How would you draw a graph showing an indirect tax on a demerit good/ negative consumption externalities graph?
It shows the correction of the market failure
MPC curve shifts left as MPC+tax
Price would rise
Quantity shifts left
What does an indirect tax do? Chain
Increases cost of production
Internalises externalities (polluter pays)
Solved overconsumption/ production issue
Promotes allocative efficiency
The tax also generates government revenue
What can government revenue be used for?
Education
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Funding alternative policies
Subsidising merit good
Funding rehabilitation for demerit goods
What are the major issues with using indirect taxation to fix market failure?
Price inelastic demand (demand needs to be elastic for the sensitivity of the response in the change in price to be effective)
The idea that the government has perfect information (they may set the tax at the wrong level. This is a ludicrous assumption because it would be impossible to set it at the perfect level to internalise the externalities)
Can be regressive (taking a bigger part of the poor income in comparison to the rich. If they over tax they can promote income inequality)
Formation of black markets
What is the issue of the government setting the taxation level too high?
Formation of black markets
Smuggling
Dangerous
People don’t know what’s in the products they are consuming
What is the value of the cigarette and alcohol black market in the UK?
Cigarettes £2bn
Alcohol £1.6bn
What do black markets need?
They need a lot of policing which is another form of market failure as it costs
What can indirect taxation be describe as and why?
Paternalistic
The government are forcing us to do what they want
Saying there’s a problem
We have to pay higher prices
Because they know all
This infringes freedom of choice
What is regulation?
It’s a non market based approach where a rule or law is enacted by the government that must be followed by economic agents to encourage a change in behaviours
What type of approach is regulation in comparison to subsidies and taxation?
Non market base approach with command and control
What are the commands in regulation?
Bans
Limits in age
Caps on emissions
Compulsory vaccines compulsory designs on cigarettes
Innovative regulations
Time limits on when alcohol can be sold
What is controls in regulation?
Control (enforcement)
Punishment (an incentive to follow the regulation eg fines bans jail)
What is the aim of regulation?
To incentive change in behaviour
Solve issues in the free market
Allocative efficiency and welfare gains
What are the negatives of regulation?
The cost (enacting the regulation, administration costs, enforcement of the regulation eg policing) if the government can’t afford the cost then the regulation is going to be weak and insufficient at fulfilling its responsibilities
Setting the right regulation (right level, right strictness, with an incentive to follow it)
Black markets forming
Unintended consequences (massive impact on profitability for firms may cause them to go abroad)
Equity (unfair on some firms)
What can regulation be described as?
Paternalistic
Very forceful from the government
Lack of freedom choice and liberty
Who enacts completion policy?
CMA (competition and market authority)
Who oversees the EU completion policy?
ECC (European competition commission)
What is the overall aim of completion policy?
The public interest is being protected from exploitation
Examples of competition policy?
Preventing excessive pricing
Promoting competition
Ensure quality standards and choice
Regulating natural monopolies
Promoting technological innovation
Reasons why competition policy may be enacted?
Antitrust and cartel agreements in oligopolies due to collusion
Investigating mergers (in the uk if a firm controls over 25% of the market it will be searched)
Liberalise concentrated markets
Monitoring state aid control
In the EU what’s an example of a subsidy?
Agricultural sector
Common agricultural policy scheme is a huge subsidy given to farmers to ensure competition in different countries
What is price regulation?
government intervention to control the price of goods and services to prevent market failure, protect consumers, or ensure fairness
What are the two types of price regulation?
Price ceilings
Price floors
What are the two types of price regulation?
Price ceilings
Price floors
What are the advantages and disadvantages of a price ceiling?
Aims to make essential goods/services affordable (e.g., rent controls, food prices).
Disadvantages:
Shortages (quantity demanded exceeds supply).
Black markets may arise.
Reduced incentives for producers to invest or supply.
What are the advantages and disadvantages of a price floors?
Common in agriculture (e.g., minimum wage, guaranteed crop prices).
Disadvantages:
Surpluses (supply exceeds demand).
Government may need to buy excess supply, creating inefficiency.
Reasons for regulation?
Market failure (e.g., monopoly exploitation or externalities).
Protecting vulnerable consumers.
Encouraging fairness or income redistribution.
Ensuring long-term stability (e.g., preventing excessive inflation).
Overall evaluation of price regulation?
Advantages:
Protects consumers from exploitation.
Ensures affordability of necessities.
Supports producer income (in the case of price floors).
Disadvantages:
Creates inefficiencies (e.g., surpluses or shortages).
Distorts market signals, leading to resource misallocation.
Can harm smaller producers or consumers in unintended ways.
Real worlds examples of price ceilings and price floors?
Price ceilings: Rent controls in New York.
Price floors: Minimum wage laws, EU Common Agricultural Policy.
