Government Intervention Flashcards
What can an indirect tax do? (negative production)
Increase cost of production which may decrease supply of the good and increase government revenue
What are the problems of indirect taxation?
Difficult to target the tax (due to imperfect information)
Conflict between raising government revenue and reducing negative externality
Could lead to a black market
If good is inelastic then cost would be passed onto consumers
Taxes are politically unpopular
May be regressive (small proportion of rich peoples cost)
What do subsidies do (positive consumption)
Increase in government spending but will increase social welfare by lowering cost of production which may be passed onto consumers, may encourage exports and equality
Disadvantages of subsidies
High opportunity cost
DIfficult to target
May make businesses inefficient
Difficult to remove once placed
What is a maximum price and minimum price
Minimum price - a price floor above equilibrium (demerit goods)
Maximum price - price ceiling below equilibrium (merit goods)
Advantages of trade pollution permits
May promote investment in green technology
Encourages efficiency
Raises government revenue
Disadvantages of trade pollution permits?
Expensive to monitor and police
Raises cost for government
Difficult to know how much permits should be allowed
may lead to regulatory capture
Benefits of state provision of goods
corrects market failure
brings equality
can ensure efficiency by the government
Disadvantages of state provision of goods
Expensive and high opportunity cost
Gov may produce wrong combination of goods
Gov may be inefficient
Corruption and conflicting objectives
What is government failure
It is when government intervention results in net welfare loss and misallocation of resources
Types of government failure
Distortion of price signals (keeps inefficient businesses running)
Unintended consequences
Excessive admin costs
information gaps
Regulatory capture
Policy myopia (ST vs LT)
