Government in action (ch16), the market failure toolkit

Question 1

What’s the fiscal policy?

Answer 1

A macroeconomic policy that involves the use of taxation and spending powers through the commonwealth budget in order to achieve certain economic objectives.

Question 2

What are some possible economic objectives from the federal sector?

Answer 2

• stabilising the level of economic activity
• maintaining

Question 3

what is a cap?

Answer 3

a government regulatory program designed to limit, or cap, the total level of emissions of certain chemicals, particularly carbon dioxide, as a result of industrial activity.

Question 4

What is the market failure toolkit?

Answer 4

Tools to stimulate the production of goods or services that would not be provided by the market to the right level (public goods, merit goods etc)

Question 5

What are some tools used to stimulate the production of goods or services that would not be provided by the market to the right level (public goods, merit goods etc) otherwise?

Answer 5

Hands on encouragements:
- Government produces the product itself
- Government contracts with private enterprise to provide the good or service

Money encouragements:
- Government subsidise private enterprise to produce more of something, e.g. apprenticeship schemes, childcare for working families, food/ fuel subsidies

Non-money restrictions:
- ‘ control licensing approval for projects of some social significance to occur on private land, e.g. building a casino
- ‘restrict or control resource usage through quotas or ‘caps’ (sometimes allowing businesses to ‘trade’ those quota rights)
- restrict or control resource usage through planning requirements etc
- Governments could impose regulations on the way goods and services are produced

Restrictions using money:
- Governments could also tax the use of resources to inhibit the production of goods and services that have some aspect of social undesirability

Question 6

What are some tools used to control high market concentration?

Answer 6

Regulation;
Pricing or quantity/quality control;
‘breaking up’ monopolies;
Not allowing monopolies to emerge;

Question 7

What are some tools used to control inequities?

Answer 7

Progressive Income tax;
Social welfare;
Subsidised (or government) provision of essentials;
Price or wage regulation of monopolies

Question 8

What are some tools to stabilize the peaks and troughs of an unstable economy?

Answer 8

Tax more during a boom and spend more during an economic downturn/ recession (fiscal policy)
- there’s also monetary policy

Question 9

Explain what is an indirect tax and some examples of it.

Answer 9

An indirect tax is a tax imposed on items that are bought or sold in the market place. It is called an indirect tax to distinguish it from an income tax. Indirect taxes may be:-

• Sales tax - tax on ordinary products at the retail level;
• Excise duty – tax imposed on the manufacturer, usually associated with cigarettes and alcohol;
• A tariff – a tax on imported goods (we’ll deal more fully with tariffs in Unit 3)

Question 10

What are some reasons for the government to provide subsidies?

Answer 10

Reasons

o to increase the supply of a product with positive externalities;
o to protect local industries against international competition – if a good is subsidized producers can compete with cheap imports.
o to support “an infant” industry. One in which the country could have a comparative advantage if the industry was given a chance or industries where the market would be dominated by a big monopolistic player. Subsidies keep it competitive.

Question 11

Who are the winners in terms of subsidies?

Answer 11

o Consumers and producers of the product who pay lower prices and receive more revenue respectively;
o Those who benefit from positive externalities;
o Those who produce and consume from infant industries;

Question 12

Who are the losers in terms of subsidies?

Answer 12

o Losers are the local taxpayers and overseas producers.
- society may lose because this discourages businesses from specializing in the production of the commodity in which they have the comparative advantage.

Question 13

What is a price ceiling and when is it effective?

Answer 13

That is imposing a maximum price above which the market price is not allowed to go. A price ceiling is only effective if it is below the equilibrium

Question 14

When are price ceilings imposed and what are some examples of it?

Answer 14

This is usually done in the name of fairness and often in a time of shortage (such as war). Without a price ceiling society may consider that prices of certain products would rise beyond the capacity of certain people to pay. If the government thinks that, in the name of equity, people should be able to afford the product then they will impose price ceilings. Examples include:-

o All basic products at times of war;
o Major sporting events, such as Olympic tickets;
o Health services;
o Public Housing

Question 15

What are some possible effects of the price ceiling and how are they dealt with?

Answer 15

A price ceiling will cause a shortage of the product. As a consequence the government must determine some way of sharing the product around. Methods include:-
o Queueing;
o Some form of rationing system;
o A lottery system;
o Whatever the seller decides!

Often when there is maximum pricing a “black market” may arise. This means that people will break the law to sell the product unofficially at a higher price. If black markets are encouraged then this can have all sorts of unanticipated antisocial and inequitable effects.

Question 16

Who are the winners and losers when a price ceiling is imposed?

Answer 16

Winners
o Those who would not otherwise be able to afford the product but can now;
o Those who operate the black market.
o Those who enjoy the equity aspects of this

Losers
o Those who miss out because of the shortage;
o Producers who get lower revenue.
o Those who are affected by the antisocial effects of the black market (organized crime, non-payment of taxes, lack of regulation, local monopolies).

Question 17

What are some reasons for imposing a price floor?

Answer 17

This is often done for equity reasons. For whatever reasons there is concern to preserve the welfare of those in a particular industry. The reason may be purely political (governments feel that voters in a particular industry or area that relies on that industry will react against them if they do not do it), or it may be out of genuine welfare concern. A minimum wage is a form of price floor designed to ensure equity in the labour market. It may be to help the industry out during a lean period because the industry has high start up costs and it would be devastating to have businesses fail during the lean periods. This is particularly important in cyclical industries such as agriculture. It may be to protect the industry from too many competitive pressures which could result in monopolies emerging or a drop in health or safety standards.

Question 18

Effects of a price floor

Answer 18

The price floor will result in a surplus at the artificially high price. Sellers do not necessarily “win” if there is a surplus unless the government does a little more. The government can do the following:-

1. Impose some sort of quota, limiting the amount that can be produced.
   2.Can also enforce a quota by issuing a limited number of licences to producers – so that not everybody can produce.
2. Can also enforce a quota by limiting the output of each producer.
3. Can ensure adequate welfare for those who are not employed.
4. It can buy up the surplus output at the artificially high price.

Question 19

Winners and losers when a price floor is imposed

Answer 19

o Consumers always lose. They pay a higher price and consume less;
o Consumers may be indirectly seen to be winning if the price ceiling maintains standards and safety and keeps supply “stable and guaranteed”;
o If the government does nothing then “winning” out of the maximum price is random. If you are lucky enough to be able to sell all of your stuff you win, but plenty of producers won’t and they will lose!
o If there is a quota system limiting how much each producer produces then whether you win or lose depends on your productive capacity;
o If there is a quota system limiting how many people are in the industry (such as abalone divers) then those who get to produce win, and those who miss out lose.
o If the government buys up the surplus or pays producers not to produce then the producers win and the taxpayer very definitely loses!!!

Question 20

What is a quota?

Answer 20

A quota is a limit placed on the amount of a good or service that a producer can produce. It may be in the form of limiting the quantity that each producer produces or it may be in the form of limiting the number of people in the industry through some form of licensing arrangement.

Question 21

What are some reasons for a quota?

Answer 21

• Protect the welfare of certain producers for equity or political reasons.
  -ensuring standards in an industry is maintained by protecting producers from too much competitive pressure.
• protect supply from cyclical fluctuations (although this is a little self-defeating – guaranteeing supply by reducing supply!).
• protect a natural resource from exploitation (such as fishing grounds).
• ensure that the resource is available for future users.
• to ensure there is no excess production with a price floor.

Question 22

What contributes almost all of the government’s revenue?

Answer 22

Taxation contributes almost all of the
Commonwealth Government’s revenue (92 per cent in 2023–24).

Question 23

What are the sub-types of taxation?

Answer 23

The sources of taxation revenue are divided into direct taxes:

e.g. personal income tax and company tax)

and indirect taxes
e.g. sales taxes).

Question 24

What are some expenses of the Commonwealth government?

Answer 24

• Social security and welfare – the largest Commonwealth Government outlay. This
  category represents transfer payments (payments aimed at redistributing income
  from the taxpayers to welfare recipients, such as the elderly and unemployed).
• Education – the Commonwealth Government provides education funding to
  universities, vocational education and training providers as well as government and
  non-government primary and secondary schools.
• Health – while the delivery of healthcare services is primarily the responsibility of
  state and territory governments, the Commonwealth Government funds Medicare
  and the Pharmaceutical Benefits Scheme as well as contributing to the funding of
  public hospitals.
• Provision of infrastructure or social overhead capital – examples include roads,
  rail, ports and communications networks.
• Protecting the environment and promoting ecologically sustainable
  development – a small area of government expenditure, which includes investment
  in clean energy and low carbon emission technologies, energy efficiency measures and
  better management of water resources.