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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
