Government Intervention Flashcards
what is gov. intervention
governments intervene to correct negative externalizes caused by certain goods or services.
taxation
- what is it
- diagram
- when we use it
- adv. and disadvantages
indirect taxation to affect supply of goods and services
specific tax= constant
ad valorem tax= % of amount (price)
indirect increase cost for consumers. (for demerit goods mostly)
diagram of specific + ad valorem
governments tax goods and services with negative externalities
for example: petrol, cigarettes, alcohol
aim of taxation is to internalise the negative externalizes that the good produces. pay extra because you cause harm to society.
advantages of gov intervention
disadvantages of gov intervention
internalizing negative externalities
cutting demand
revenue gain
VIMMP
very difficult to put a price on negative externality
could reduce products International competitiveness
money raised by demerit goods how do we know spent on reducing the effects of the externalities
hard to put monetary value on cost of negative externality
price inelastic demand not reduced by extra cost of tax
advantages of taxation
disadvantages of taxation
internalizing negative externalities
cutting demand
revenue gain
VIMMP
very difficult to put a price on negative externality
could reduce products International competitiveness
money raised by demerit goods how do we know spent on reducing the effects of the externalities
hard to put monetary value on cost of negative externality
price inelastic demand not reduced by extra cost of tax
adv of subsidies
dis of subsides
- goods with positive externalities are internalized (producer does not worry about costs)
- subsidies can change preferences E.g. electric scooters instead of cars
- more positive externalities
dis
- subsidies may have opportunity cost
- producers may become inefficient and reliant on subsidies. less incentive to innovate
- replacing price inelastic product may be price inelastic
how do public goods cause market failure
public goods cause market failure in form of missing markets as businesses have no incentive to provide goods or services
gov intervention for evaluation the …
effective- grantees the provision (new supply) of merit goods which benefits the society. although opportunity cost no longer a problem in a missing market
efficiency- easier to provide them because of scale benefits (incr production decr costs). free rider issue solved through TAXES
equity- if provided free then people of all income can access. provision on groups of needs rather than those who can pay.
price controls
what is maximum price
draw diagram
(known as price ceiling) may be set to increase consumption of a merit good or to make a necessity more affordable. market caps on necessity.
ADVANTAGES
helps tp increase fairness
prevents monopolies from exploiting
DISADVANTAGES
supply will shrink
may need to introduce rationing scheme. to allocate goods to right people does take time
what is minimum price
set up price by gobernemtn to make suppliers get a fair share anything below this will not be accepted.
e.g. EU agriculture policy ensures there’s a gurguraantee minimum price for many agricultural products.
ADVANTAGES
- guranteed minimum income encourages investment
- lots of stock piles easy to access
DISADVANTAGES:
-consumers will be paying higher amount
government spending on mimimum price scheme is expensive
what is the types of privatisation
CCT
Complete sale- gov. sells it out completely e.g. Royal Mail this happens rarely
Contracting out- gov. pays firm to carry out a good or service for them- this is mostly used.
Competitive tendering- private firms bid to gain a contract with gov. and compete with each other.
adv and disadv of privitisation
adv
>improves efficiency- profit making
>improves resource allocation- price mechanism
>lower taxes- pricate firms do not operate on taxes.
>gov receives revenue from selling firms
dis
>private firms/ monopolies can charge higher prices. (evaluation point but the government controls everything so if they’ve contracted out will they then let people chose prices?!)
>private firms focus less on safety and well-being and more on profit incentive
>a new firm will need to be regularly checked (if doing correctly/maintaining the standards e.g. private clinic contracted out for some hospital members
>Long run costs more and adds more to the gov. debt
what is nationalism
adv + dis (short)
when the gov. takes complete control of the market for example healthcare in UK
adv
>solving market failure e.g. education free
dis
>very expensive, may not provide the same efficiency - quality
regulation meaning
when used
3 reasons regulation needed
regulation is difficult to set…
rules that are enforced by an authority and backed up by legislation. e.g. cannot sell cigarettes to under 18
>used when undesired behavior =reduces market failure
reasons to use regulation
1.reduce demand for demerit goods
2. reducing the power of monopolies
3.protect the consumer and producer
Hard to correct/ Set Price uk has law factory's pollute how do other countries don't we know £10 or £10,000
monitering regulation
very expensive, if punishment for regulation is not harsh / fine, people will continue to do, you want it to be a deterrent.
state provision meaning
governments directly provides goods and services through the tax provision e.g. healthcare, medical equiotment, defense
overcome MF
>foreign funding
>revenue tax provision
>private sector
adv.
no one is paying for it, solves market failure
disadvantages less incentive to operate ineffiecently due to absence of price mechanisms. half heartedly nothing in it for them. > less responsive to consumers demands >opportunity cost >self reliance gets reduced
