Government Intervention Flashcards
Learn government intervention: effect of a specific tax diagram in a PC market
Include: all areas, effect on industry and a firm
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Define deadweight loss?
The fall in total surplus resulting from a market distortion
such as tax, is called the deadweight loss
Learn ad valorem tax diagram
All areas
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What is an ad valorem tax? Why does this lead to unparalleled supply lines when it is imposed?
It is a tax levied based on the value of goods (eg. VAT)
The lines are not parallel because the amount of tax paid is smaller at lower prices
Welfare effects of a price floor diagram All areas (inc. if gov destroys or gives excess to schools, cost to taxpayer)
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Define price floor?
A legal minimum price at which a good can be sold (eg. Milk)
Define market failure?
A situation in which market on its own fails to produce an efficient allocation of resources
4 causes of market failure?
Externalities
Public goods
Market power
Incomplete information
Define a negative externality?
A cost imposed on a third party
Define a positive externality?
A benefit to a third party
Learn negative externality diagram:
Compare actual surpluses to social optimum surpluses
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Define marginal social cost?
The full cost of producing another unit of a good, including the marginal cost to the producer and any harm caused to third parties
Total welfare under negative externality = ?
Prod surp + cons surp - external cost
What is meant by internalising the externality?
Altering incentive so that consumers and producers take account of the external effects
What is a pigovian tax?
A tax imposed on an activity that creates a negative externality
Optimum tax = ?
MSC - MC
Equal to the negative externality created by each unit
Issue with pigovian taxes?
Can be hard to estimate exact size of externality therefore tax may do more harm than good
Define a quota?
A regulation mandating that the production or consumption of a certain quantity of a good or externality be limited
Learn quota diagram
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Define tradeable permit?
A government issued permit that allows a firm to emit a certain amount of pollution during production and that can be traded to other firms
Two ways to correct for monopoly power?
Lump sum tax
Price ceiling
Define lump sum tax?
A tax of a fixed amount, independent of the output produced (fixed cost to a firm)
Draw lump sum tax diagram for a monopoly:
All areas
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Draw price ceiling correction of monopoly diagram:
All areas
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How does a price ceiling eliminate the deadweight loss?
By setting a price ceiling equal to the epics that would be were the industry perfectly competitive, the deadweight loss would be eliminated
Draw market power and negative externality and pigovian tax diagram: and explain
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Optimum tax for market power negative externality pigovian diagram?
Optimum tax < MSC - MC
See explanations
