Government Intervention Flashcards
Indirect taxes
Taxes levied on the expenditure of goods or services
Advantages of Indirect taxes
- help internalise the external costs
- Work with market forces so choice still exists in term of consumption and production
- reduce external cost
- tax funds raised for the government
- difficult to evade
- tend to be paid in small amounts and regularly
Disadvantages of indirect taxes
- Difficult to quantify external costs and place value on them
- indirect tax increase cost of production making them less competitive
- widespread use of indirect taxes may be inflationary
- firms may relocate to others countries with less tax
- demand for service may be inelastic so reduction may be small
- tax revenue may not be used properly
- unintended consequences such as smuggling
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Subsidies
A grant provided by the government
Advantages of subsidIes
- Subsidies can reduce external costs
- susbsidies on renewable energy promotes sustained economic growth
- Subsidies work with market forces so choice is maintained
Disadvantages of subsidies
- difficult to quantify external benefits
- Opportunity cost to government subsidies
- Unintended consequences - firms become over depenedent
Maximum Prices
A ceiling price set by the government on a good or service above which it cannot rise
Advantage of maximum prices
- Reduce exploitation of consumers
- reduce inequality
- help people on low income afford key products
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Disadvantages of Maximum Prices
- Unintended consequences - distorts operation of price mechanism
- Producer surplus fall so firms have less income to invest in improvements
- problems arise of how to allocate supply to compensate for excess demand
- difficult to monitor and enforce maximum price control
Minimum Price
A floor price set by the government on a good or service below which it cannot fall
Advantages of minimum prices
- reduce the consumption of goods which are harmful to consumer and have high external costs
- encourages producers to switch to making healthier products
- reduce fluctuations in prices so make it easier for consumers to budget
Disadvantages of minimum prices
- Unintended consequences distorts the price mechanism leading to an excess supply
- price will increase leading to hardship for consumers on low income
- May be ineffective if price is inelastic
- A national minimum wage may cause unemployment for workers in low skilled labour markets
Tradable Pollution Permits
Pollution permitcs that can be bought and sold in a market
Which limits emission
Advantages of Tradable Pollution Permits
- Market is created for the buying and selling of carbon emits - price mechanism used to internalise the external costs
- National governments can raise funds by selling reserve pollution permits
- firms have an incentive to invest in clean technology
- Production costs will increase for firms that exceed their pollutions allowance so revenue increases
- Firms are able to bank their excess pollution permit
Disadvantages of Tradable pollution permits
- Information gap might cause EU commision to issue to many permits so less incentive vice versa
- Disputes have arise over allocation of carbon permits
- Firms may pass the cost of the permits unto their consumers
- Price of pollution permits have fluctuated
Provision of information
- to encourage healthy goods and services
- to discourage unhealthy goods and services
- to notify and remind people of laws for their own protection
Regulation
Government rules in markets to influence the behaviour of consumers and producers
Advantages of regulations
- Simple to understand
- Limits can be imposed on the operating of firms to protect consumers
- It is possible to fine or close down companies that have abused regulation
- Fines acts as a deterrent for consumers and producers to not break the law
- May help reduce the problem of asymetric information
Disadvantages of regulations
- Can be expensive to monitor and enforce
- Regulations may be set at the wrong level to correct market failure
- Regulations may increase the productions cost of firms making them less competitive
Government Failure
When government intervention leads to an inefficient allocation of resources and a net welfare loss
Administration costs
The costs which arise in the formulation, monitoring and enforcing of goverment measures to correct market failure
