Government Intervention Flashcards
Specific tax
Fixed amount charged per unit of a good, environmental tax on landfill sites
Ad Valorem taxes
Charged as a proportion of the price of a good
Aim of indirect taxes
To increase costs for producers to reduce supply shifting the supply curve to the left.
Why do governments put indirect taxes on goods with negative externalities
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.
Effect of Price elasticity of demand on tax
Price inelastic the extra cost will mostly be put on the consumer but elastic the producer will take on more of the extra cost.
Advantages of indirect tax
- 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
Disadvantages of indirect tax
- 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
The aim of a subsidy
Encourage production of a good with positive externalities which shifts the supply curve to the right.
Advantages of subsidies
- make a merit goods cheaper makes it more affordable increasing demand
- can support domestic industries till it grows to become internationally competitive
Disadvantages of subsidies
- 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
Why is a maximum price set
To increase consumption of a merit good or make a necessity more affordable.
Maximum price in practice
Set below the market equilibrium leading to excess demand and shortage of supply, prevent shortages supply will then be rationed out.
Why is a minimum price set
To make sure suppliers get a fair price, guaranteed price
Minimum price in practice
Set above market equilibrium to reduce demand and cause excess supply, this is then bought and stockpiled or destroyed by the government.
Advantages of price controls
- 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
Disadvantages of price controls
- 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.
Advantages of state provision
- 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
Disadvantages of state provision
- 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
Privatisation
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
Advantages of privatisation
- improves efficiency
- improves resource allocation
- increased revenue for government
Disadvantages of privatisation
- 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.
Regulation
Rules enforced by authority to control activities of producers to change undesirable behaviour, used to reduce monopoly power or reduce demerit good use.
Why can regulations be difficult to set
- 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
Deregulation
Removing regulations to increase competition in markets by removing barriers to entry