Government intervention Flashcards
What is the kuznets curve what does it show
a graph that shows the relationship between environmental degradation and economic growth.
What is government intervention
When the government intervenes to correct market failure
What is the role of the government in free markets
Governments role is to PUM:
protect property rights
up hold rule of law
maintain value of currency
Why does the gov intervene (3)
Correct market failure
Improve long and short term economic performance
To achieve a more equitable distribution of wealth
What are two economic viewpoints on Gov intervention
Pro free market and interventionist
Explain Pro free market viewpoints
Gov should act as watchmen and only provide merit goods (healthcare/ education) when markets fail
should also provide a enterprise environment with minimal interference.
Explain interventionist viewpoints
The market is uncompetitive and prone to market failure
lack of info and uncertainty causes problems
It’s the Government’s job to stabilize the economy as they know better than firms.
How does the gov correct market failure (8)
Gov provision of public goods & merit goods
indirect taxes
Forcing positive externalities Legislation & regulation
subsidies
price ceilings
price floors
competition policy
trade pollution permits
What is a Subsidy
What is a price floor
A fixed price enacted by the gov, usually above the market equilibrium price, cannot fall below.
what is a price ceiling
A fixed price enacted by the gov, usually below the market equilibrium price, cannot fall below.
What is Ad valorem tax
Ad valorem tax (VAT) is Tax that is taken as a % of the price being charged
What is specific tax
Specific tax is the tax per unit bought.
Give an example of Indirect taxes
Specific and Ad valorem Tax
Give an example of direct taxes
Income tax
How many types of tax are there
2
What are the two different types of tax
Direct and Indirect tax
What is the purpose of taxes(2)
To raise gov revenue
To correct market failure
Who benefits and who suffers from indirect tax. Does this depend on anything ?
Producers and consumers suffer
Gov benefits but this depends on consumer burden or extra consequences e.g the black market
What are the values of the producer& consumer burdens and the government revenue when PED is elastic
Consumer burden=Low
Producer burden= High
Gov revenue=Low
What are the values of the producer& consumer burdens and the government revenue when PED is inelastic
Consumer burden=High
Producer burden=Low
Gov revenue=High
What are the values of the producer& consumer burdens and the government revenue when PED is perfectly inelastic
Consumer burden=Everything
Producer burden=0
Gov revenue=high
What are the values of the producer& consumer burdens and the government revenue when PED is perfectly elastic
Consumer burden=0
Producer burden= everything (takes all the price )
Gov revenue= low
What are the values of the producer& consumer burdens and the government revenue when PES is elastic
Consumer burden=High
Producer burden=Low
Gov revenue=High
What are the values of the producer& consumer burdens and the government revenue when PES is inelastic
Consumer burden=Low
Producer burden= High
Gov revenue=Low
What are the values of the producer& consumer burdens and the government revenue when PES is perfectly elastic
Consumer burden=Everything
Producer burden=0
Gov revenue=high
What are the values of the producer& consumer burdens and the government revenue when PES is perfectly inelastic
Consumer burden=0
Producer burden= everything (takes all the price )
Gov revenue= low
What are price floors used for
To protect producers from price volatility
To solve market failure
Who benefits or suffers from price floors?
Consumers suffer due to cost of intervention buying & consumer surplus is eroded.
Producers Benefit Depending on intervention buying.
With IB very happy & good. If no IB not as good.
Governments will also benefit from IB but this depends on unanticipated. consequences.
