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Economic Theme 1 > Government Intervention > Flashcards

Government Intervention Flashcards

1
Q

Specific tax

A

Fixed amount charged per unit of a good, environmental tax on landfill sites

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2
Q

Ad Valorem taxes

A

Charged as a proportion of the price of a good

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3
Q

Aim of indirect taxes

A

To increase costs for producers to reduce supply shifting the supply curve to the left.

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4
Q

Why do governments put indirect taxes on goods with negative externalities

A

To internalise the externality, producer or consumer covers the cost of the externality as the tax makes revenue for government to use to offset the negative externalities of the good.

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5
Q

Effect of Price elasticity of demand on tax

A

Price inelastic the extra cost will mostly be put on the consumer but elastic the producer will take on more of the extra cost.

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6
Q

Advantages of indirect tax

A
  • cost of negative externality is internalised which may reduce demand for the good which reduces the effects of the negative externality
  • if demand isn’t reduced the revenue gained by the government can be used to offset the externalities
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7
Q

Disadvantages of indirect tax

A
  • can be difficult to put monetary value on negative externalities cost
  • inelastic goods demand won’t be reduced by extra cost of the tax
  • indirect taxes increase cost of production reducing firms international competitiveness
  • government my spend revenue inefficiently so negative externalities aren’t offset
  • Hard to know externality size
  • indirect taxes are regressive
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8
Q

The aim of a subsidy

A

Encourage production of a good with positive externalities which shifts the supply curve to the right.

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9
Q

Advantages of subsidies

A
  • make a merit goods cheaper makes it more affordable increasing demand
  • can support domestic industries till it grows to become internationally competitive
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10
Q

Disadvantages of subsidies

A
  • all subsidies have an opportunity cost
  • may make producers too reliant so they won’t seek organic growth as much in innovation or reducing costs
  • price won’t decrease significantly for inelastic goods
  • difficult to remove once put on
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11
Q

Why is a maximum price set

A

To increase consumption of a merit good or make a necessity more affordable.

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12
Q

Maximum price in practice

A

Set below the market equilibrium leading to excess demand and shortage of supply, prevent shortages supply will then be rationed out.

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13
Q

Why is a minimum price set

A

To make sure suppliers get a fair price, guaranteed price

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14
Q

Minimum price in practice

A

Set above market equilibrium to reduce demand and cause excess supply, this is then bought and stockpiled or destroyed by the government.

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15
Q

Advantages of price controls

A
  • maximum prices help to increase fairness reduce poverty
  • prevent monopolies and monopsonies from exploiting
  • stockpiles can be used when economic shocks affect demand
  • minimum prices guarantee income to producers which encourages investment
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16
Q

Disadvantages of price controls

A
  • maximum prices create excess demand which stops some from buying the product and causes black markets
  • minimum prices consumers will pay higher prices than the equilibrium
  • high opportunity cost for government
  • waste of resources to create excess supply, even more so if it is destroyed.
17
Q

Advantages of state provision

A
  • increase consumption of merit goods like health and education has positive long term impacts
  • free provision can help reduce inequalities
  • redistribute income as more tax comes from wealthier citizens
18
Q

Disadvantages of state provision

A
  • less incentive to operate efficiently, resources are used inefficiently as there is no price mechanism
  • fail to meet consumer demands as it lacks profit motivation
  • opportunity cost
  • reduces self reliance
19
Q

Privatisation

A

Transfer of a firm from public sector to private sector to create a more efficient industry as the price mechanism will be at play so they will want to maximise profit

20
Q

Advantages of privatisation

A
  • improves efficiency
  • improves resource allocation
  • increased revenue for government
21
Q

Disadvantages of privatisation

A
  • public monopoly will become private so extra measures will need to be taken in deregulation
  • less focus on safety and quality more on profit
  • private firms need regulation which adds to government debt and higher taxes in the future.
22
Q

Regulation

A

Rules enforced by authority to control activities of producers to change undesirable behaviour, used to reduce monopoly power or reduce demerit good use.

23
Q

Why can regulations be difficult to set

A
  • need for worldwide regulation in areas like use of renewable energy
  • excessive regulation may be expensive and force firms to move abroad
  • can be very expensive for the government and hard to set the right levels of regulation
24
Q

Deregulation

A

Removing regulations to increase competition in markets by removing barriers to entry

25
Q

Advantages of deregulation

A
  • improves resource allocation as more firms enter the market so it comes more contestable which means prices fall and output increases
  • used alongside privatisation as removing barriers to entry to stop monopoly power
  • improves efficiency
26
Q

Disadvantages of deregulation

A
  • less safety and protection for customers
  • can’t fix market failures like negative externalities
  • difficult to deregulate natural monopolies
27
Q

Tradable pollution permits

A

Allow firms to emit a certain amount of pollution in a year, these can be traded between firms.

28
Q

ETS

A

EU Tradable pollution permit scheme, with emissions allowances distributed to firms. Firms will be fined if they exceed their permit but they can buy permits to cover extra emissions.

29
Q

Advantages of tradable pollution permits

A
  • reduce each year so help reduce pollution, encourages sustainable and more efficient firms
  • low level pollution firms will benefit as they can gain revenue from selling their permits
  • internalise the externality of pollution
30
Q

Disadvantages of tradable pollution permits

A
  • optimal pollution levels can be hard to set up, and set at the wrong level can lead to government failure
  • administrative costs to both governments and firms
  • High pollution levels will still exist which is harmful
31
Q

Other government intervention methods

A

Information provision - to stop asymmetrical information causing market failure run information programmes

Promoting small business- subsidies and start up funds for entrepreneurs to increase competitiveness

32
Q

Government failure

A

Often unintended consequence of an intervention to correct a market failure that results in resources being missallocated and net welfare loss

33
Q

Examples of market distortion caused by government failure

A
  • income taxes can act as a disincentive for working hard, as they are proportional
  • max and min prices can distort price signals which leads to a surplus in supply
  • subsidies encourage firms to be inefficient
34
Q

How does government bureaucracy cause market distortions

A

Red tape can interfere with the price mechanism as it prevents efficiency as safety checks may create long delays in production so restrict supply

35
Q

How do conflicting policy objectives cause government failure

A

Policy objective like sustainability may have negative impact on unemployment, government are also put under pressure to make decisions quickly which are only short term solutions.

36
Q

How does imperfect information cause government failure

A

Incorrect valuation of market failure due to imperfect information would cause taxes and subsidies to be set inefficiently.

37
Q

Where have maximum prices failed

A

Venezuela many maximum prices were put on milk and toilet paper which stopped them being sold in supermakrets creating a black market

38
Q

How can government failure be caused by unintended consequences

A

consumers and producers may react to new policies in unexpected ways leading to welfare losses
—> targets for NHS patients treated reduced quality of care

39
Q

How can excessive administrative costs cause government failure

A

A lot of government spending isnt used on improving social welfare as much of it is sucked into administrative costs, NHS example

Economic Theme 1 (7 decks)

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