Government Intervention Flashcards
What is the advantage of taxation in dealing with externalities?
Taxation internalizes the externality and the market produces at the social equilibrium position, maximizing social welfare.
What is the disadvantage of taxation in dealing with externalities?
- The size of the externality is difficult to know, making it difficult to target the tax.
- the government may face conflict between raising revenue and solving the externality.
- taxes are also regressive, meaning the poor spend a larger proportion of their income on indirect taxes than the rich do.
What is the disadvantage of subsidies?
The government has to spend a large amount of money, which will have a high opportunity cost. Subsidies can also cause producers to become inefficient, especially if they are in place for a long time. Once introduced, subsidies are difficult to remove.
What is the advantage of pollution permits?
Pollution permits ensure that pollution falls to the targets set by the government, maximizing social welfare. The government can also raise revenue by selling permits and fining firms that exceed their pollution limit. This encourages companies to use and invest in green technology.
What is the disadvantage of pollution permits?
Monitoring and policing pollution permits can be expensive, and the fines imposed by the government need to be large enough to ensure firms follow the permit. It may also raise costs for businesses, which will be passed onto consumers. It may be difficult to know how many permits the government should allow.
What is the advantage of regulations?
Regulations ensure consideration of externalities, prevent exploitation of consumers, and keep consumers fully informed. This helps to overcome market failure and maximize social welfare.
What is the disadvantage of regulations?
Regulations can be expensive for the government to monitor, incurring an opportunity cost.
Compared to tradable pollution permits, regulation is a less efficient method of reducing pollution.
Firms may pass on costs to consumers in the form of higher prices, and excessive regulation may reduce competition and innovation.
What is the advantage of a minimum wage?
A minimum wage can achieve greater equity and narrow the distribution of income between high-paid and low-paid workers.
Poverty may be reduced as low-paid workers gain more income, and the unemployed may be encouraged to join the labour market.
The higher wage is an incentive for individuals to supply their labour. It can also prevent worker exploitation by labour market monopsonists.
What is the disadvantage of a minimum wage?
A high minimum wage can cause price inflation and rising unemployment
The competitiveness of goods abroad in high-wage economies can suffer compared to low-wage economies due to high production costs faced by businesses hence, they incur opportunity costs less is spent on innovation
The level of the minimum wage and the elasticity of demand for and supply of labour are important evaluation points.
Minimum wage definition?
The lowest amount that an employer is legally required to pay their employees per hour of work.
Indirect Taxation definition?
A tax on goods and services, which is usually added to the price of the product and paid by the consumer
Regulation definition?
Rules and standards established by the government or other organizations to ensure compliance and safety in various industries.
Pollution permits definition?
Tradable permits issued by the government of which allow companies to emit a certain amount of pollutants, with the aim of limiting overall pollution levels.
Subsidies definition?
Financial support provided by the government to businesses, individuals or organizations, typically to encourage or promote certain activities or industries.
Definition of takeover?
A takeover occurs when an existing business expands by buying more than half the shares of another business
