Governemnt Intervention Flashcards
Government intervention on demerit and merit goods (3)
Tax / subsidy
Provide certain goods
Inform society of externalities - advertising
Gov intervention on externalities (2)
Tax
Subsidy
Aim of a tax (2+)
Internalise the externality
Revenue = offset effect of E = police for alcohol and drugs
Example of tax (4)
Landfill tax
Attempts to reflect social cost of using landfill = pollution
Positive - encourages recycling
Negative - encourages illegal dumpling
Adavantages of tax (2+)
Revenue
Reduced demand = reduced supply = reduced externality
Disadvantages of tax (3)
Difficult to put value on externality
If demand is inelastic - tax has no effect
Firms relocate to avoid tax
Why do firms use a subsidy
To encourage the consumption + production of merit good
Advantages of subsidy (2)
Price reduced = demand increases = more can afford it
Change preferences to chapter merit good
Disadvantages of subsidy (4)
Difficult to put monetary value on externality
Subsidy = opportunity cost
Producers get subsidy = less incentive to be efficient
Inelastic demand
What are price controls
Max and minimum prices
What is a max price (4)
Prevent market price riding above a certain level
Price ceiling
Increase consumption of merit good = makes it affordable
Below ME
Adavantages of max price (2)
Increase fairness + equality
Reduced exploitation of monopolies
Disadvantages of max price (2)
Excess demand = black market
Rationing used to allocate
What is a minimum price + example (4)
Price floor
Suppliers get fair price
Above ME
CAP - guaranteed min price for agricultural products
Advantages of min price (2+)
Producers have min income
Stockpiles = excess supply = used when supply is low or overseas aid
Disadvantage of min price (2)
Excess supply = inefficient use of resources/capital
Opportunity cost
What is a buffer stock (3)
Stabilises prices and prevents shortages in supply
MP below price floor = gov buys it and stockpiles it until demand increases and price increases
MP above price ceiling = gov sells stockpiles = supply increases and price reduces
Problem with buffer stocks (4+)
Min price too high = excessive purchasing to maintain min p
Storage + security of stock = expensive
Deterioration
Producers overproduce because guaranteed min price = waste of resources
What is buffer stock theory
selling goods at max price will pay for buying goods at min price
What is a state provision - reduce externalities (2)
Gov uses tax revenue to pay for certain g/s so they’re free when consumed
NHS, waste disposal, education, street lights etc
Good state provision stops market failure (3)
Gov increase consumption with merit goods
Reduces inequality in access
Redistribution of income = tax wealthier more
Problems with state provision (4)
Less incentive for firms to operate efficiently = lack of Price mechanism
Opportunity cost
Public sector = lacks innovation
Taxes higher
Drawback to NHS (2)
Free at point of delivery = excess demand
Leads to long wait lists
What is a traceable pollution permit (2)
Used to control pollution
Allocate permits to allow firms to emit certain level of pollution
Rules of TPP (3)
Firms fined if exceed allowances
Firms can buy extra
Each year allowances reduce = incentive to lower emissions
Adavantages of TPP(4)
Encourages firms to increase efficiency + pollute less
Firms with low pollution can sell allowances = money
Gov can use fine revenue
Internalises the externality
Negative of TPP (5)
Difficult to set optimal level of pollution
If it’s too high = no incentive for firms to reduce emissions
Too low = new firms can’t start
Firms can relocate
Firms can buy more allowances
Reasons for government failure (4)
Unintended consequences
Info gap
Administrative costs
Distortion of price signals
What is unintended consequences
Misallocation of resources and net welfare loss
Exmaple of unintended consequences (2)
Landfill tax to encourage recycling
Increase fly-tipping (illegal dumping) = pollution and resources needed to clear it
What is market distortion (3+)
Income tax = disincentive to wrk
Subsidies = firms less deficit = remove incentive of profit
Price controls = producers overproduce because guaranteed min price = surplus
Regulation (2)
Rules enforced by authorities and backed up with legislation
Control activities of C/P to change undesirable behaviour
Exmaple of regulations (4)
Reduce use of demerit goods = ban or limit scale
Reduce power of monopolies = price caps
Consumer rights act = protect against info gaps
Fines
