Government intervention Flashcards
maximum price
-Aims to increase consumption levels or prevent price rising so that it is affordable to consume- reduce relative poverty
-Prevent monopoly exploitation
-Set by government below equilibrium
-Demand increases but there is a shortage of supply
Explaining diagram
-Initial market equ at PeQe and the ceiling is at Pmax
-Low prices reduce incentive to supply - curve contracts
-Increased incentive to consume - demand extends
-Some consumers willing to pay P2 (consumer surplus) so the quantity requires rationing or auctioning
Evaluation maximum prices
Benefits:
-prevent exploitation of monopolies
-consumer welfare gains increase as prices are held down
-Incentives for firms to cut costs to maintain profits - innovation is encouraged
Disadvantages:
-Black market transactions- consumers are willing to pay more due to restricted supply
-Decline in quality to maintain profit - reduce quality to cut costs
-If profit is ultimately lowered then there will be less money for capital investment in the long run
-Firms can raise prices of other goods so consumers have no net gain
-shortages
-Long-term solutions like building more housing should be made however temporarily can be beneficial
Examples of maximum price
-Rent controls
-housing made more affordable especially for those on low incomes
-Prevented landlords exploiting high demand for properties due to shortage however creates even more of a shortage
Minimum price
-Set by gov above existing free market
-Help producers earn more
-Decrease consumption of demerit good
Diagram explanation
-High price increase incentives to supply and decrease incentive to consume
-Demand contracts
Evaluating minimum price
BENEFITS:
-consumption decreases so less negative externalities from consumption (strain on NHS)
-Producers receive higher price (agricultural industry)
DISADVANTAGES:
-costs the government to store/buy/export excess supply
-Producers may become overdependent
-Depends on elasticity of good- inelastic goods will not be affected
-Black market- police have to find and can cause serious health problems
-minimum wage may cause firms to lay off workers or increase prices due to increased COP- increased unemployment- excess labour supply
Examples of minimum price
-minimum wage
- protect workers from wage exploitation
-incentivises more workers to join labour market if a minimum pay is guaranteed
-incentivises productivity leading to overall greater local GDP
-Agriculture- income of producers increase as goods are inelastic
-Sugar tax
-reduce negative externalities like antisocial behaviour, less strain on criminal justice system, increase productivity at work and overall health
Indirect taxes
-taxes levied on the expenditure of goods and services
-initially paid by the producer, raising production costs
-specific tax: levied as a set amount per unit
-ad valorem tax: levied as a percentage of the selling price per unit
Example:
57.95p per litre
vat at 20%
Consumer and producer burden of indirect tax
-Producers can pass on some of the higher costs of production to the consumer by charging a higher price - liability of the tax
-the higher price is the consumer burden/ incidence
-Producers cannot pass on all of the tax so the remainder is paid by the producer having to accept a lower price which is the producer burden
-consumer above producer
Analysis and evaluation of indirect taxes
-Aim is to discourage consumption of certain goods often demerit which have negative externalities
-Also discourage production
-Raises gov revenue that can be used to further reduce negative externalities or provide other services
-May not be effective at reducing consumption if the good is price inelastic
-The burden paid by the consumer is very high so the firm does not lose out on too much profit
-The gov revenue earned however can be used to find alternative methods at reducing consumption/production.
-Regressive- low income groups are paying a higher proportion of income in tax increasing inequality
-Encourage tax evasion, less effective at gaining government revenue- people use the black market and find a way of buying the same good, imports from abroad increase
-Additional tax paid by firms might harm employment and profitability of those industries
Subsidies
-Grant given by government to firms or individuals to encourage production and consumption of a good
-Lowers production costs so shifts supply curve to the left
-P3 paid by consumers, p1 received by producers
-Producers pass on falling cost of production to the consumers in form of lower price
Example:
Farmers- food security, steady income even with market fluctuations, farmers can remain competitive
-However, limited resources and only for certain farmers, overproduction
Local theatre group:
-protect declining industry
-builds community benefiting health and happiness
-Profit can be used to expand
-Other indutries more imprtant, education
-dependant
Consumer and producer gain of a subsidy
-producer above consumer
-Subsidy could cause large fall in price benefiting the consumer
-Or producers might not pass on subsidy in form of lower price - could absorb the subsidy themselves increasing profits
-More inelastic- greater fall in price for consumers
-More elastic- benefits falls more on producer
Analysis and evaluation of a subsidy
-Lower production costs which boosts profitability- increased profits may be reinvested into new technology increasing output in the long run
-Used to protect declining industries
-prevents increasing (structural) unemployment within certain industries
-Opportunity cost- money better spent elsewhere
-Reduce incentives to cut costs- dependent on subsidies
-Benefit large firms who have the money to persuade government to subsidise them
-Possibly encourage harmful production
