Government Intervention Flashcards
What is government intervention
State gets involved in markets and takes action to correct market failure
How can government change resource allocation
Regulation
Taxes
Subsidies
Maximum and Minimum Prices
Main reasons for government intervention
Correct market failure(s)
Achieve a more equitable final distribution of income and wealth
Improve performance of the macroeconomy
What can fiscal policy intervention be used for
To alter the level of demand for different products and the pattern of demand
Types of fiscal policy intervention
Indirect taxes
Subsidies
Tax relief
Changes to taxation and welfare payments
Define stakeholder
Any person or organisation with an interest in a specific project or policy decision
What is the aim of an indirect tax
To make the polluter pay
Internalise a negative externality
Difficulties of implementing indirect taxes
Setting the right rate
Cost of collection
Inelastic demand
Redistribution effects - they are regressive
Increased costs - may cause inflation
What do subsidies provide
Financial support for producers with the aim of lowering marker prices and encourage consumption of goods and services which lead to positive externalities
What is a maximum price
Legally imposed price ceiling in a market suppliers cannot exceed
Set below equilibrium price
What is a minimum price
Legally imposed price floor in a market which marker price cannot fall
Set above equilibrium price
What is a monopoly
A firm which has more than 25% of industry sales
What is monopoly power
Ability of firms to charge prices above cost
What is the guaranteed minimum pricing scheme
A scheme in which excess supply from a minimum price is purchased by the government at the minimum price
Done to protect producer incomes
What is free market equilibrium
When MPB meets MPC
