Government Intervention Flashcards
Define producer surplus
Producer surplus is the difference between the amount that a producer of a good actually receives and the minimum amount the producer is willing and able to sell the good.
Define consumer surplus
Consumer surplus is the difference between the maximum amount that a consumer is willing and able to pay for a good and the amount that he actually paid for the good.
In general, govenments intervene in markets for two reasons which are?
- To improve efficiency in resource allocation
- To improve equity in resource allocation
What is a direct tax?
A direct tax is paid directly by the taxpayer to the tax authority.
E.g Individual income tax
Purpose of direct taxes?
They are often used to redistribute income to achieve greater equity. It also can be used to influence consumption and investment decisions.
What is an indirect tax?
Indirect taxes are compulsory taxes levied by the government on expenditure/spending. They are paid to tax authorities by the producers of the good or service.
E.g GST
What is the purpose of indirect taxes?
To achieve allocative efficiency to produce the combination of goods most desirable for society. To also raise government revenue to fund provision of public goods.
What is a subsidy?
A grant given by the government to encourage the production/comsumption of a good or service.
Define price ceiling.
Price ceiling is a legally established maximum price. This means that producers are prohibited from selling the good above the maximum price.
What is the rationale of establishing a price ceiling?
It is usually imposed to achieve equity, such as ensuring the affordability of basic necessities.
What is an unintended consequence of price ceiling?
Creation of a black market, which is a market where sellers ignore the government’s price restriction and sell illegally above the legal maximum price. This brings about inequity and worsens the affordability issue for the lower income group.
Ways the government and mitigate the problem arising from black markets.
Policies to encourage production (direct provision), First come first serve basis policy, government rationing, random allocation
Define price floor.
Price floor is a legally established minimum price. Firms affected are permitted to sell the goods at prices at or above the minimum price.
What is the rationale of price floor?
It is to protect the income of producers and also to protect low skilled/low wage workers by offering them a wage that is above the market equilibrium to help reduce poverty.
What are some consequences price floor can bring?
Price floor might cause firms to be even more inefficient as high prices might not motivate firms to find a more efficient method of production and to reduce their cost of production.
What are some policies the government can establish to remove the persistent surplus?
Buy up the surplus, divert the surplus, dumping, dispose the surplus
