Government Intervention Flashcards
Why do government use indirect taxes
To affect the supply of some goods/services
Define indirect tax
Can be imposed on the purchase of goods or services to cover the new extra cost incurred by firms because of the tax
What are the two types of indirect tax
Specific tax
Ad valorem tax
Define specific tax
A fixed amount is charged per unit of good
Define ad Valorem tax
Charged as a proportion of the price of a good
Draw a specific tax curve
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Draw an ad valorem tax curve
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What are the properties of a specific tax curve
Tax is the same fixed amount at a low price and high price
What are the properties of ad valorem tax
Non parallel shift
Biggest impact on higher price goods
Tax is smaller at low price and higher at high price
Why do government tax goods with negative externalities
To internalise the externality that the good produces
I.e. make the producer or consumer of the product cover the cost of the externality
What is an example of a specific tax
Landfill tax
Define consumer burden
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Define producer burden
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What are the advantages of indirect tax
Cost of the negative externalities is internalised in the price of the good
Disadvantages of indirect tax
Difficult to put monetary value on the cost of the negative externalities
Increase the costs of production
Reduce international competitiveness
Subsidies are usually paid to producers by the government
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What is the aim of subsidies
Used to encourage the production and production of goods + services with positive externalities
Can also be used to reduce negative externalities (reduce pollution on roads) by e.g. subsidising electric cars
Draw a subsidies diagram with labels showing total cost of subsidy to government, consumer gain and producer gain
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Benefit gained from subsidies Is proportionate to
The elasticity of the supply + demand curves
Advantages of subsides
-benefit of goods with positive externalities is internalised I.e. cost of externalities is covered by subsidy
-subsides can change preferences
E.g. merit good cheaper -> more affordable -> Inc. Demand
Disadvantages of subsidies
Difficult to put monetary value on the benefit of the positive externalities
Opportunity cost
May make producers inefficient and reliant
Subsidised goods/services may not be as good as the ones they’re aiming to replace
Why might a max price be set
To increase consumption of a merit good or to make a necessity more affordable
What does It mean on a diagram when the max price is set above the equilibrium curve
Has no impact
What does It mean in a max price diagram if the max price is set below the equilibrium
Leads to excess demand
Shortage of supply
Rationing function
Excess demand cannot be cleared by market forces
Advantages of a max price
Increases fairness
Prevent monopolies from exploiting consumers
Disadvantages of max price
Some people will be unable to buy
Introduce rationing scheme to allocate good
Excess demand can lead to the formation of a black market
Why are minimum prices set
So suppliers can get a fair price
With minimum price, if it is set below market equilibrium
It has no impact
With minimum price, if above the equilibrium it will
Have an impact
Advantages of a minimum price
Producers have a guaranteed minimum income
Encourages investment
Disadvantages of a minimum price
Resources used to produce excess supply could be used elsewhere
Destroying excess goods is a waste of resources
What is state provision
Where government provide certain goods + services
What funds state provision
Tax revenue
Pay for certain goods + services-> free or mostly free
Disadvantages of state provision
Less incentive for firms to operate efficiently
May fail to respond to consumer demands -> lacks profit motive
Reduce self reliance
Why is health care funded by gov
Society benefits from positive externalities
What are the disadvantages of health care being funded by government
Excess demand , long waiting lists
Wasteful of resources
May not always respond to patient wants + needs
Reduce self reliance-> have hospital visits for minor problems
Draw a minimum price diagran
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Define regulation
Rules enforced by an authority usually backed up with legislation
What is regulation used for
To control the activities of producers + consumers , change the undesirable behaviour
Reduce use of demerit goods + services
Reduce power of monopolies
Provides some protection from asymmetric information
Why can regulation be difficult to set
Can be expensive to monitor compliance
If punishment for breaking isn’t harsh, may not be a deterrent and change behaviour
What can regulating bodies do
Set rules and impose price controls
Used to increase competition in a market
E.g. ofcom
What will provision of information do
Impact the demand for the good
What can government intervention cause
Misallocation of resources + net welfare loss (gov failure)
Define government failure
Unintended consequence of an intervention to correct a market failure
What can government intervention cause
Market distortion
How does government bureaucracy interfere how the market works
Rules + regulations (red tape) to prevent marker failure -> enforcement of these is bureaucracy
What is excessive bureaucracy
Government failure
What is regulatory capture
Influence the decisions of the regulator to make sure outcomes favour companies and not the consumers
Sources of government failure
Conflicting policy objectives
Inadequate information
Administrative costs
Regulatory capture
Examples of government failure
The common agricultural policy
Why might gov provide subsides to public transport
Reduce car usage + pollution level
However bus travel is seen as an inferior good so if it is cheaper it may not have an increase in demand
Why might government introduce fishing quotas
Make fishing more sustainable + prevent overfishing
Problem with fishing quotas
Fish stocks depleting even with quotas in place -> suggests quotas have been set too high and overfishing is still taking place
Poor monitoring of fish catches, boats could be overfishing undetected
What is consumer burden
The amount of tax that is passed onto a consumer from an increase (ad valorem)
What Is producer burden
The amount of tax absorbed by the firm
Amount of tax The firm still has to pay after passing on some of the burden onto consumers
