Government Intervention 1.4 Flashcards
Pros of Indirect Taxation
Can target a particular industry, make the “polluter pay”
Tax can be used as an incentive to reduce the externality
Tax funds raised by the government can be used to “clean up the environment” etc
Level of externality reflected by increase in tax
Cons of Indirect Taxation
Difficult for the government to fix a monetary value on an externality
Not all costs/ externalities can be split this way
Indirect taxes increase the costs of production for firms, making them less competitive
Demand for the good or service may be price inelastic and so the reduction in consumption may be small
May encourage illegal markets
Direct Tax
Collected by the inland revenue e.g income tax, corporation tax
Indirect Tax
Collected by the customs and excise e.g. VAT, Fuel duties
Tax Incidence: The consumer burden
The consumer burden of a tax increase reflects the amount of which the market rises
Tax Incidence: The producer burden
The decline in revenue they get after paying tax
Subsidies
Rewards/ reverse tax given to businesses for producing something
Advantages of subsidies
Give firms who deserve it the finance they need to produce the good
Encourages businesses to produce that good which has positive externalities
Allows for more of that useful good to be used by everyone
Lets the firms lower the selling price to make it more accessible
Increase the competitiveness of the market
Disadvantages of Subsidies
Might not be needed to produce the good
Firms may waste the subsidies given on non- beneficial activities
Firms may become lazy and not produce as much as they’re getting money regardless
All subsidies have an opportunity cost
Minimum Price Levels
Set to make sure suppliers get a fair price
A minimum price set below the ME would have no impact
If its set above the ME it will reduce the demand and increase the supply leading to excess supply
To make the minimum price levels work , the gov will buy the excess supply at a guaranteed price to either stockpile or destroy the good
Pros of Min Price levels
Designed to give producers a fair price/ more income
Protects the business industry
Protects the consumers from over buying harmful/ demerit goods
Cons of Min Price levels
Higher prices for consumers
Market is in dis- equilibrium
Higher tariff necessary on imports to keep prices high
What to do with the over supply of products?
Maximum price levels
A ceiling price set to increase consumption of a merit good or to make a necessary good more affordable
If set above ME, will have no impact
If set below ME means theres excess demand and a shortage in supply
Pros of Maximum price levels
Leads to lower prices for consumers
Maximum prices can help increase fairness, by allowing more people to purchase certain goods + services
Maximum prices prevent monopolies exploiting customers and suppliers with higher prices
Usually reserves for the important goods like food and rent
Cons of Maximum price levels
Leads to a shortage
Since demand is higher than supply, some cannot buy the good
Can lead to a black market
Government may need to introduce rationing scheme to allocate goods
