Government Intervention Flashcards
What is A Public Good?
Non-Rivalrous - Other consumers using the good does not diminish the utility other consumers experience
Non-Excludable - People cannot be excluded from consuming the good (e.g Roads)
Non-Rejectable - Consumers do not have the freedom to reject (e.g A Flood Defence)
Why Does The Government Have To Provide Public Goods?
Private Sector cannot sell for profit, meaning that the government must provide them as the goods have a high marginal social benefit.
What is a negative externality?
MSC>MPC (Cigarettes, Diesel Cars, Fast Food)
Harms third party due to things such as pollution, damaged roads, obesity etc
‘Overconsumed and Underpriced’
What is a positive externality?
MSB>MPB (Dental Care, Sports)
Underconsumption harms a third party as not all potential benefits are being utilised
‘Underconsumed and Underpriced’
Minimum Price vs Ad Valorem Tax
Minimum Price:
- Reduced Consumption
- Incentive for improved quality
- Protects Producers
Ad Valorem:
- Revenue can be used to fun mitigation programmes
- Increases Price
If Demand is inelastic, consumption will not fall significantly
Subsidies Advantages and Disadvantages:
Advantages:
- Can encourage production and consumption of merit goods
- Can lead to firms growing and becoming internationally competitive
Disadvantages:
- Opportunity Cost
- Can cause Zombie Businesses and distort the market
What are Tradable Pollution Permits?
Permits that allow firms to pollute a certain amount
Steady reduction of the number pollution permits increases their price
The higher price incentivises firms to move away from pollution
What is an indirect vs a direct tax?
(Indirect) Are levied on goods and services and can be passed onto consumers through higher prices.
(Direct) Are levied on income, wealth or profits and are paid directly by the taxpayer to the government
What is the difference between an Ad Valorem Tax and a Unit Tax?
Ad Valorem Tax (charged as a % of the goods price) e.g VAT
Unit Tax (fixed amount per unit) e.g 10p per pack of cigarettes
What is an information gap?
When buyers and sellers lack full knowledge to make rational decisions - causing a misallocation of resources
Methods To Close Information Gaps
Government Regulation
Information Campaign
Regulating Advertising
Advantages Of A Maximum Price
Increases affordability (reduces inequality)
Encourages consumption (think merit goods)
Disadvantages Of A Maximum Price
Excess demand will cause shortages (reducing the number of those who can access the good)
Reduced incentive to supply may cause unemployment
What is government failure?
When intervention causes greater inefficiencies compared with leaving the market alone
Causes Of Government Failure: Distortion Of Price Signals
Minimum prices can cause overproduction (artificially high price mics strong demand) and minimum prices (artificially low price mimics low demand) can cause shortages leading to a waste/insufficient amount of resources
Causes of Government Failure: Administrative Costs
Can be expensive to monitor and implement - high bureaucratic costs (Inspection costs, surveillance costs to ensure firms are following, storage costs from purchasing excess supply)
Opportunity cost from spending those implementation costs on education
