Government Intervention Flashcards
how might gov intervene?
Gov intervene to ensure the market considers the external costs and benefits.
- indirect taxes & subsides
- tradable pollution permits
- provision of the good
- provision of information
- regulation
What are indirect taxes and the impact on supply?
A tax levied on a good/ service
- they increase production costs for producers - supply less
- this increases market price and demand contracts
What are the two types of indirect taxes?
- Ad Valorem taxes (percentages added to the total price)
- specific taxes (set tax per unit)
Reasons for gov intervention in markets?
- correct market failure
- support firms
- promote equity
- support poorer households
- collect gov revenue
What is a subsidy?
A subsidy is a payment from the gov to a producer to lower their costs of production and encourage production.
(Encourage production of merit goods)
What are the disadvantages of subsidy?
- The opportunity costs to the government and potential higher taxes. (To raise revenue up again)
- Firms potentially becoming inefficient if they rely on the subsidy
- gov failure if they subsidise less efficient industries.
Effect of subsidy on the supply curve?
Shifts supply curve left - more merit goods produced - price falls
What is a maximum price?
A price set below the market equilibrium price by the gov.
Why might maximum price be set?
Where the consumption/ production of a good is to be encouraged (stops the price from going too high)
Disadvantages of maximum prices.
- could lead to gov failure if they misjudge where the optimum market price should be
- it could reduce firms profits which in the long run could have been invested (however, producers may raise other good prices so consumers would have no net gain)
- black markets could emerge
- shortage is created
Advantage of maximum prices for consumers?
Could lead to welfare gains for consumers by keeping the prices low
What are minimum prices?
A price set above the market equilibrium price by the government
(Prevents prices from being too low)
Why might minimum prices be set?
To discourage the consumption/ production of a good
- it would reduce negative externalities from consuming demerit goods
What are tradeable pollution permits?
Permit given to polluting firms, so firms will be able to pollute up to a certain amount ( any surplus on their permit can be traded)
- they attempt to limit the amount of negative externalities
What are the advantages of tradeable pollution permits
- benefits the environment in the long run (encouraging green production methods)
- revenue raised from the permits - revenue could be reinvested into green products
- if the price of additional permits is more than the cost of investing in new pollution tech -firms will be incentivised to switch to greener tech
- firms can sell their spare permits and raise revenue
What are the disadvantages of tradable pollution permits?
- firms may relocate where to where they can pollute (reducing prod costs)
- firms may pass high prod costs onto the consumer
- competition could be restricted in the market if permit create a barrier for potential firms
- could be expensive for gov to monitor emissions
What is state provision of public goods?
When the state provide a public good which are underprovided in the free market (e.g. such as education & healthcare)
- these have external benefits
What are the benefits of the state providing public goods?
- this makes merit goods more accessible, which might increase their consumption
- this could also yield positive externalities
Why are public goods not provided by the free market?
Due to the free rider problem:
Where the goods and non-rival and non-excludable, so if provided anyone can use it without paying - loss of revenue.
Disadvantages of providing public goods?
It could be expensive for government to provide public goods - will incur an opportunity cost of spending their revenue
Why does the government provide information in the market?
- To ensure that there is no information failure and consumers make informed economic decisions
- information gaps cause market failure so information is provided for reduce asymmetric information
What is regulation?
Regulation is a rule or law enacted by the gov that must be followed by economic agents. Used to encourage a change in behaviour.
- gov regulate either by commanding/ controlling
Why do government regulate in markets?
To limit harm from negative externalities of consumption/ production
What commands do gov apply?
- bans (e.g public smoking ban)
- limits (e.g . age limits on buying alcohol)
- caps (e.g. carbon emission caps/ finishing)
- compulsory actions (e.g graphic warnings on cig packets)
