Gov Intervention Flashcards
What is a subsidy
A payment from the gov to a producer to lower their prod costs and encourage them to produce more, can encourage consumption of merit gds (which r under-consumed)
What are price controls
the setting of a min or max price by the gov so prices unable to adjust to the equilibrium determined by D and S- result in market disequilibrium and therefore shortages (excess D) or surpluses (excess S)
What are max prices
AKA price ceilings, set up by gov, encourage consumption by making a good or service more affordable, or to prevent monopolies exploiting consumers
Price ceiling example
Max legal rent below the market determined level, tries to make housing more affordable.
But the Qs is less than the Qe, so long waiting lists. Not profitable to landlords so often rundown and poorly maintained. Tenants may sublet above legal level
What are min prices
AKA price floors, sellers can’t legally charge below it e.g. min prices in Scotland for alcohol to discourage consumption
What are indirect taxes
imposed on spending to buy gds and services, paid partly by consumers, but are paid to by gov by producers (⬆️ in prod costs) and so are called indirect- 2 types, specific and ad valorem
Indirect tax, type one, specific taxes
Set as a constant amount per unit of output (eg £2.10 per cigs) similar to ⬆️ in costs of production
Indirect tax, type two, ad valorem taxes
Set as a % of selling price e.g. VAT 20%
Shifts S curve up but as a steeper gradient coz it’s a %: amount of tax per unit ⬆️ as price ⬆️
Eval of indirect taxes
Effect of indirect tax depends on degree of comp between producers (if intense price comp and D elastic then firms won’t pass on any costs to consumers)
Subsidy and elasticity
More inelastic D curve = greater CS gain from subsidy
When D elastic= producers supply more
Disadvantages of subsidy
OC to gov
Firm inefficiency of over reliant
Gov failure if sub inefficient industry
Welfare loss coz gov spending > gains in CS and PS and a subsidy creates over allocation of resources
Max price positives
Welfare gains for consumers coz low p
⬆️ efficiency for firms as have to keep costs low
BUT firm might raise p of other gds, or reduce their profit (=⬇️ investment and dynamic efficiency)
Traceable pollution permit positives
Benefit environment in LR by encouraging firms to use greener prod methods
Gov could raise rev from permits by selling them to firms (could then invest in green tech)
Raise rev for greener firms who sell permits
Traceable pollution permit negatives
Lead to firms reallocating where they can produce
Firms could pass on higher prod costs to consumers
Could create a barrier to entry so ⬇️ comp
Expensive for gov to monitor emissions
State provision of public gds
Solves under provision of merit gds, but expensive to provide and Gov have OC of spending rev
