Government Intervention Flashcards
Why are indirect taxes used when the government intervenes?
The aim of indirect taxes is to internalise the externality by taxing the product so the output and consumption are at the level at which SMB=SMC.
How to draw this as a diagram
Look at diagram
What are the advantages of indirect taxes
Incentive to reduce pollution- the most polluting firms pay more than the least polluting firms
-Source of revenue for the government that can be used to compensate those affected by the pollution
-few administrative costs involved with this method
What are the disadvantages of indirect taxes
-ineffective in reducing pollution if demand is price inelastic
-Difficulty of setting an appropriate tax because of the problem of quantifying the external costs
-increased business cost
When can subsidies be used?
-in the case of external benefits to production
-ths should encourage production so that the social optimum level is reached.
What are the advantages of subsidies
-reduction in cost of production enabling suppliers to reduce the price
-incentive for people to increase consumption
-might help to reduce inequality
What are the disadvantages of subsidies
-Cost to the tax payer of providing subsidies
-ineffective in increasing consumption if demand is inelastic
-Difficulty of setting an appropriate subsidy because of the problem of quantifying the external benefit
What are maximum prices?
A price usually set by the government to make it illegal for firms to charge more than a certain price for a given quantity of product
What contexts does the government set price ceilings?
Rented accommodation, for rugby league players and for items of food
What does the maximum price have to be at compares to the equilibrium price
-always below the equilibrium price
What is a result of that shortage?
A black market with supplies of the product to sell it illegally at a significantly higher price than the maximum price
What are the advantages of maximum prices?
They enable consumers on low incomes to be able to afford to buy a product
They help to prevent an increase the country’s rate of inflation
They can prevent the exploitation of consumers by monopolies
What are the disadvantages of maximum prices?
There is a danger that shortages mean some consumers are unable to find supplies of the product
Producers may exit the market in order to to use their resources to produce goods that are more profitable.
If the government subsidies producers to encourage them to maintain output there will be a significant cost to the taxpayer
What are minimum prices?
A government may set minimum prices to ensure that producers receive a certain price for their product or that consumers have tot pay at least a set price for the product.
How can minimum prices be used?
Commodities- a government may set a minimum guaranteed price for a particular commodity. This means that producers know in advance that they will receive a certain price per kilo no matter what how much is produced. This is designed to ensure greater certainty and therefore act as an incentive to producers to supply sufficient quantities of the commodity.
Consumer goods- determined consumption. In 2018, Scotland introduced a minimum price for alcohol
Labour market: NMw to ensure that workers receive a minimum of a certain mount per hour.
Where does the government set the minimum guarantee price
Above the equilibrium price
What does a minimum prices result in?
A surplus of LM kilos. The government buys this surplus and stores it for years in which there is a shortage.
What are the advantages of minimum price guaranteed price schemes?
-producers know it in advance the price they will receive for their product
-the greater certainty enables producers to plain investment and output.
-They can prevent exploitation of producers by wholesalers and retainer who have significant buying power.
What are the disadvantages of minimum guaranteed price schemes
If the minimum price guaranteed is set too high there will be surpluses each year
These schemes involve costs of storage which must be borne by taxpayers
These schemes encourage over production and may therefore result in an inefficient allocation of reserves
How can minimum prices be used in developing economies?
-guarantee farmers a set price per unit or their produce
What are tradeable pollution permits?
Rights to sell and buy actual or potential pollution in artificially created markets. This is used to reduce external costs.
The government issues permits to firms that allow them to pollute u to a certain limit. Any pollution above this limit is subject to fines.
The key to this system is that permits may be traded between firms so that clean firms can sell their surplus permits to firms that are more polluting.
What are the advantages of tradable pollution permits?
These schemes work through the market mechanism
They are an incentive for firms to reduce pollution
The costs of administering these schemes are low relative to those associated with systems of regulation
There can be planned reduction in pollution over time.
What are the disadvantages of tradable pollution permits?
Pollution will continue albeit at a lower level than previously
Large efficient firms might buy up the permits and continue to pollute
They need to be internationally enforced to be effective
They might make the country’s goods less internationally competitive.
