government intervention Flashcards
paper 1
What does indirect tax do?
a levy on expenditure that will increase cost of production to firms but can be transferred to individuals
How can you show indirect tax on a diagram
Indirect tax on negative externality diagram of overproduction/consumption
MSC = MPC + indirect tax
Chain of analysis of effect of indirect tax
- increase cop of firms
- internalises the externality consequences to firms
- solves overconsumption and overproduction
- promote A.E and generates government revenue
- hypothecating the tax
What phrase means the third party issue becomes the polluters problem
- internalising the externality (when polluters pay)
What is hypothecating the tax means
Using revenue generated from the tax to further fund the policies to resolve to issue
How can hypothecation be used to reduce the negative externality of demerit goods
- education + advertisement
- funds alternative policies
- fund alternative subsidies
- fund rehabilitations
list 5 Ev of indirect tax not being effective
- depends on PED
- assumes gov has perfect knowledge where to set tax (over/under tax)
- lead to rise in informal economy
-regressive (cause income inequality) - paternalist issue
What elasticity of PED is when indirect tax effective
PED is elastic as change in price would lead to proportionate change in quantity
How can you show on a diagram that government do not have perfect information in setting indirect tax
Shift in MPC=tax does not reach MSC
what is indirect tax regressive
Tax would take a higher proportion of poorer households disposable income than the rich leading the income inequality
What can an overtax in indirect tax lead to?
- rise in informal economy as people may smuggle goods of poorer quality leading to further market failure
What does paternalised issue mean
When the government is overexaggerating the cost/market failure of a good leading to opportunity cost and restriction of economic agents freedom
why may demerit goods be PED inelastic
- may be addictive like smoking and alcohol
What is regulation
Laws enacted by the government that must be followed by economic agents that aim to change their behaviour
Examples of regulation on command and control aspects
Command: bans, limits, caps, compulsary, innovative regulation
Control; enforcement, punishment e.g fines, bad publicity
3 reasons to why regulation is used?
- incentive to change behaviour to influence more/less consumption/production
- solves issues of free market without using the price mechanism
- make firms A.E leading to welfare gains
list 4 cons of regulation
- very costly
- hard to set right regulations (strict or lax)
- rise of black market (unintended consequences)
- Equity; may be unfair to different firms as some may rely on the ban then others
What are the two types of indirect taxes?
Ad valorem - % of the value of good
Specific tax - tax per unit
What does indirect tax internalise
Internalises the externality to firms
Is subsidies a form of government intervention?
Yes
What are the cons of subsidies
- firms can become inefficient, zombie firms reliant on subsidies
- government do not have perfect information on how much to support (over/under spend)
What is maximum and minimum price
max price - price ceiling below equilibrium that is statutory
min price - price floor above equilibrium also statutory
What is trade pollution permits
government set a limit of how much pollution a firm can produce, these permits can be traded and sold
What is deregulation
when governments reduce legal barriers to entry, incentivise new firms to enter, leading competition and greater efficiency
list theme 1 methods of government intervention
- max price and min price
- indirect taxes
- subsidies
- state provisions of public goods
- provision of information
- trade pollution permits
- regulation
list theme 3 government intervention
- control mergers
- price regulation
- profit regulation
- quality regulation/performance target
- privatisation
- nationalisation
- subsidies
- windfall tax
- deregulation
- health and safety of workers (workers right)
- demergers
- competitive tendering
restrict monopsony power
3 pros of deregulation
- increase competition lead to allocative efficiency, leading to increase consumer surplus and choice
- increase in productive and X efficiency to stay ahead of competitors
- rise in D.E due to SNP to remain competitive
2 cons of deregulation
- If there was a natural monopoly, there is a loss of natural monopoly as increase in AC as EOS is lost, fall in P.E leading to wasted duplicated resources = allocative inefficiency
- lead to formation of oligopolies and local monopolies, there will be no guarantee on what would occur
