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Economics Micro nozza > Government Intervention > Flashcards

Government Intervention Flashcards

1
Q

Indirect taxes

A
  • can be imposed on purchase of goods and services
  • two types: specific taxes - a fixed amount charged per unit of a particular good, no matter price of a good
    Ad valorem tax - charged as a proportion of a good. Causes non parallel shift in supply curve
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2
Q

Government taxes to deal with negative externalities

A

May use multiple indirect taxes on one item -> aims to internalise the externality that the good produces -> make revenue for government which can be used to offset effects of externalities

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3
Q

Total amount of tax paid

A
  • amount of tax passed on to consumer depends on PED - the more inelastic, the more passed on to consumer
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4
Q

Advantages of taxation

A
  • cost of negative externality internalised -> may reduce demand and level of goods production -> reducing effect
  • revenue gained can be used by government to offset externalities
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5
Q

Disadvantages of taxation

A
  • Difficult to put monetary value on cost of negative externality
  • for inelastic demand goods, demand isn’t reduced by extra cost of tax
  • increase cost of production -> reduces product’s international competitiveness
  • firms may choose to relocate and sell goods abroad to avoid tax -> remove contributions o economy
  • revenue received by gov’t may not be used on reducing effects of externalities
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6
Q

Subsidies

A
  • govt pay subsidies with aim of encouraging production and consumption of goods and services with positive externalities. Supply curve shifts to right.
  • can encourage purchase and use of goods/services which reduce negative externalities
  • proportion of subsidy producers and consumers benefit from depends on elasticity of supply and demand curves
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7
Q

Advantages of subsidies

A
  • benefits of goods with positive externalities is internalised
  • can change preferences. Making merit good cheaper increases demand for it
  • positive externalities still present
  • can support domestic industry until it grows to point that it can exploit EOS and become internationally competitive
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8
Q

Disadvantages of subsidies

A
  • difficult to put monetary value on benefit of positive externalities
  • any subsidy has opportunity cost
  • make producers inefficient and reliant on subsidies - less incentive to reduce costs or innovate
  • effectiveness depends on PED
  • subsidised goods and services may not be as good as those they’re aiming to replace
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9
Q

Maximum prices

A
  • set to increase consumption of merit good or to make a necessity more affordable
  • if set above market equilibrium, will have no impact
  • if set below -> excess demand and shortage in supply -> product needs to be rationed out
  • a good PES and PED will have big effect on amount of excess demand
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10
Q

Advantages of max prices

A
  • can help increase fairness -> allows more people ability to purchase certain goods and services
  • can prevent monopolies from exploiting consumers
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11
Q

Disadvantages of max prices

A
  • since D>S, some people can’t buy product
  • govt may need to introduce rationing scheme to allocate good eg ballot
  • excess demand can lead to creation of black market for good
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12
Q

Min prices

A
  • make sure suppliers get fair prices
  • if set below market equilibrium, will have no impact
  • if set above, will reduce demand and increase supply
  • govt must purchase excess supply at guaranteed min price. The goods bought will be either stockpiled or destroyed.
  • goods PES and PED will have big impact on amount of excess supply
  • restrict monopsony power as buyer can’t keep negotiating lower prices
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13
Q

Advantages of min price

A
  • producers have guaranteed min income -> encourages investment
  • stockpiles can be used when supply reduced or as overseas aid
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14
Q

Disadvantages of min price

A
  • consumers paying higher price than market equilibrium
  • resources used to produce excess supply could be used elsewhere -> inefficient allocation of resources
  • schemes may have high opportunity cost
  • destroying excess goods is waste of resources
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15
Q

State provision

A
  • govts use tax revenue to pay for certain goods and services so that they’re free/largely free, when consumed
  • e.g. NHS, state education, waste disposal and the fire and police services
  • can come directly from govt or alternatively govt can purchase good/service from private sector and provide it to public for free
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16
Q

Advantages of state provision

A
  • can be used to increase consumption of merit goods, such as education and health
  • can help reduce inequalities in access to services
  • can redistribute income
  • level of state provision is value judgement made by govt -> based on how important to society they think it is that they provide good/service
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17
Q

Disadvantages of state provision

A
  • less incentive to operate efficiently (no price mechanism)
  • may fail to respond to consumer -> lacks motive of profit to determine whats supplied
  • large opportunity costs
  • can recue individuals’ self reliance
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18
Q

Health care being state provided

A
  • govt funds NHS so society benefits from positive externalities of health care
  • drawbacks include: NHS is free at point of delivery -> excess demand and long waiting lists
  • hospitals and clinics can be wasteful of resources
  • may not always respond to needs and wants of patients
  • can reduce patients’ self-reliance
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19
Q

Privatisation

A
  • the transfer of the ownership of a firm/industry from the public sector to private sector
  • can lead to more efficient firm/industry -> will be open to free market competition
20
Q

Privatisation includes:

A
  • sale of public firms
  • contracting out services - govt pays private firm to carry out work on their behalf
  • competitive tendering - private firms bid/compete to gain contract to provide service for govt. Will compete on price and quality of service offered
  • Public Private Partnerships (PPPs) - private firm works with govt to build something or provide service for public. An example is a PFI (Public Finance Initiative) - a private firm is contracted by govt to run a project
21
Q

Advantages of privatisation

A
  • increased competition improves efficiency and reduces x-inefficiency
  • improves resource allocation - market signals
  • PFIs enable building of important facilities govt couldn’t afford
  • PFIs eans lower taxes in SR -> govt wont pay for new facility
  • govt gains revenue from selling firms
22
Q

Disadvantages of privatisation

A
  • privatised public monopoly likely to become private monopoly -> extra measures needed
  • privatised firms less focused on afety and quality
  • PFI often cost more in LR than worth - adds govt debt
  • PFI means higher taxes for future generations to pay for cost of govt leasing facility
23
Q

Regulations

A
  • rules enforced by authority and backed up with legislation -> legal action can be taken against those who break rules
  • used to try and reduce market failure and its impacts
    can help in: - reducing use of demerit goods and services. Reducing power of monopolies. Providing some protection for consumers and producers from problems arising from asymmetric info
24
Q

Limitations of regulations

A
  • difficult for govt to determine what is correct
  • need for regulation in some areas to be worldwide rather than just one country e.g. greenhouse gas emissions
  • following excessive regulations expensive -> may force firms to close or move country
  • monitoring can be expensive for govt and if punishment for breaking regulations isn’t harsh enough, then they may not be a deterrent and change behaviours
25
Q

Regulations set to increase use of renewable energy

A
  • UK govt introduced Renewable Obligation Certificates to encourage use of renewable energy sources
  • Electricity suppliers given min percentage of power that must be from renewable soruces
  • companies can sell their ROC certificates onto suppliers
  • suppliers that fall short have to pay financial penalty. Money raised from penalties distributed between suppliers who did reach target
26
Q

Deregualtion

A
  • removing or reducing regulations. Removes some barriers to entry therefore increases competition and tackles market failure
  • of ten used alongside privatisation - prevents private public monopoly becoming private monopoly
27
Q

Advantages of deregulation

A
  • improves resource allocation. Markets more contestable -> new entrants -> prices fall closer to MC as output increases
  • prevents private monopolies
  • improves efficiency by reducing amount of red tape and bureaucracy
28
Q

Disadvantages of deregulation

A
  • difficult to deregulate natural monopolies as these need large infrastructure therefore only need one of them
  • cant fix other market failures e.g. negative externalities, consumer inertia, or immobile factors of production
  • less safety and protection for consumers
29
Q

Competition policy

A
  • aims to protect interests of consumers by promoting competition and encouraging market to function more efficiently
30
Q

What the European Commission and UKs Cmpetition and Markets authority look for to determine unfair monopolistic behaviour

A
  • mergers - may choose to stop merger that would give firm too high market share
  • agreements between firms - agreements involve price fixing, splitting markets, or limiting production are anti-competitive, cause market inefficiency and unfair to consumers
  • opening of markets to competition - to prevent private public monopolies becoming private monopolies
  • financial support from govts (European Comission only) - may give firms unfair advantage over firms in other countries
31
Q

Effectiveness of competition policy

A
  • effectiveness determined by info available - decision on whether behaviour is anti-competitive or unfair determined by info available
  • if info reliable - intervention will improve efficiency, allocate resources more effectively and improve fairness to consumer
  • costs of competition policy outweighed by benefits usually
32
Q

Competition policies

A
  • price caps - 1) RPI - X - firms must make real price cuts. RPI = Inflation. X= efficiency improvements govt/regulating body expects to make. 2) - RPI - X + K - commonly used in water industry. K = amount of investment firms will need to make in order to achieve efficiency improvements
  • govt/regulating body could monitor prcies so they stay fair
  • regulations to ensure quality standards, such as in food production or construction
  • regulate profits using windfall taxes on ‘excessive’ profits - prevent monopoly power but reduces their incentive to improve efficiency
  • setting performance targets with penalties if not received
33
Q

Tradable Pollution Permits

A
  • govt will set optimal level of pollution and allocate permits that allow firms to emit certain amount of pollution over period of time
  • can trade permits -> firm with low emissions can sell permits to other firms who want to buy permits to allow them to pollute more
  • use market mechanism
  • EU emissions trading system uses this system; permits called emissions allowances. These distributed between EU member govts -> allocated to firms -> each year number of allowances reduced -> gives incentive to lower emissions -> firms can invest in emission saving schemes outside EU to offset own emissions
34
Q

Advantages of tradable pollution permits

A
  • reduce pollution to an acceptable level -> encourage firms to be efficient
  • firms with low pollution -> can sell permits -> invest more and expand
  • govts can use revenue to invest in other pollution reducing schemes
  • internalise externality of pollution
35
Q

Disadvantages of tradable pollution permits

A
  • optimal pollution level is difficult to set -> 1) if too high, firms have no incentive to lower emissions. 2) If too low, new firms wont enter market and existing firms may relocate -> harming economy. 3) can lead to govt failure
  • high levels of pollution in specific areas may still exist -> harmful to environment
  • there are administrative costs involved in such schemes, to both govts and firms
36
Q

Extension of property rights

A
  • tackles market failure of absence of property rights
  • owners of rights can charge consumers and producers for using property and sue if permission hasn’t been granted -> negative can reduce effect of negative externalities
  • could improve management of resources so they’ll last longer
  • negative externalities more carefully monitored and regulated
37
Q

Disadvantages of extension of property rights

A
  • can be difficult for govt to extend property rights
  • externalities can affect more than one country
  • high costs of suing can put off organisations from taking action to uphold rights
  • difficult to put value on use of property
  • difficult to trace source of environmental damage
38
Q

Evaluation of nationalisation

A

+ govt can ensure goods and services the country needs are provided
+ govt can set output and prices of an industry at level that most benefits society
+ can be easily regulated so they act in best interest of consumers
+ can pay public sector workers fair wage
+ greater EOS
+ can pay suppliers fair price
- inefficient -> no incentive to reduce costs and make profit
- little incentive to act prudently -> firm will know govt and tax payers can bail them out

39
Q

Government failure

A
  • misallocation of resources and net welfare loss as a result of govt intervention
  • can cause market distortions rather than removing them
  • excessive bureaucracy can lead to govt failure
  • conflicting policy objectives
  • inadequate info
  • administrative costs
  • regulatory capture
40
Q

How excessive bureaucracy leads to govt failure

A
  • > red tape can interfere with forces of S+D -> market inefficiency
  • > lots of red tape -> time lags -> govt cant respond quickly to needs -> country at competitive disadvantage to countries that respond quickly
  • > bureaucracy can lead to lack of investment and prevent economy from working at full capacity
41
Q

How conflicting policy objectives leads to govt failure

A
  • > govt effort to achieve objective may have negative impact on another
  • > politicians constrained by what is politically acceptable
  • > govts often favour short term solutions as theyre under pressure to solve problems quickly
42
Q

How inadequate info leads to govt failure

A
  • > imperfect/asymmetric info means its difficult to assess extent of market failure -> hard to put value on govt intervention needed
  • > govt may not know how consumers will react
43
Q

Administrative costs leads to govt failure

A
  • > govt measures to correct market failure can use large amount of resources -> high costs
  • > policing is expensive when needed
44
Q

Regulatory capture leads to govt failure

A
  • firms covered by regulatory bodies can influence decision of regulator to ensure outcomes favour companies, not consumers
45
Q

Common Agricultural Policy (CAP)

A
  • main aim is to correct market failure caused by fluctuating prices for agricultural products. Would provide reasonable stable income for farmers
  • uses subsidies, buffer stocks, and tariffs on imported goods
46
Q

Problems with CAP

A
  • encourages increased output -> environmental damage from greater use of intense farming methods and chemical fertilisers
  • large amounts of wasted food products -> excess is destroyed
  • can be argued welfare gain for farmers < welfare loss to consumers
  • min prices -> oversupply of products -> have to be bought and stored by govt -> sell these stocks at low price outside EU -> farmers outside EU cant compete
47
Q

Road Congestion Schemes

A
  • method of reducing external costs linked to road congestion and pollution that it creates. Also called road pricing
  • charge users to travel on roads where congestion is problem
  • charge needs to be set for socially optimum level of traffic. Working out that charge can be difficult
  • Impacts of wrong charge - 1) Too low a price -> limited impact on traffic levels 2) Too high a price -> too few cars in area -> reduced trade for businesses within area -> also causes congestion in other areas

Economics Micro nozza (7 decks)

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