Government intervention Flashcards
What is government intervention?
Government intervention- internalises (external cost/benefit of ๐ incorporated in price) external costs/benefits โฆ corrects market failure by allocating resources โฌ๏ธ efficiently
How can the government intervene?
1) Subsidies
2) Indirect taxes
3) Max prices
4) Min prices
5) Tradable pollution permits
6) State provision of info
How many ways can the government intervene?
6
What is an indirect tax?
Indirect tax- levied on expenditure of ๐/๐งน- imposed on ๐/๐งน with โฌ๏ธ external costs
What is an example of an indirect tax?
Petrol โฝ๏ธ
What does an indirect taxation external cost diagram look like?
See bottom of page 19 on economics theme 1 notes
What are the evaluation points of indirect taxation?
๐- tax funds raised used by government to clean up environment OR compensate victims of pollution
- BUT based on assumption that government โ๏ธ corrupt- may keep ๐ต for themselves โฆ โ๏ธ used well
๐- If demand inelastic then external cost โ๏ธ reduced as consumption still โฌ๏ธ- ALSO if demand inelastic then tax may have bigger burden on consumer than producer
๐- difficult to evade- included in market price- sellers collect tax & send to government
- BUT Firms may declare income โฌ๏ธ than actual to evade tax e.g. India ๐ฎ๐ณ
๐- makes firms โฌ๏ธ competitive as costs โฌ๏ธ-> outcompeted by foreign firms OR firms may relocate to other nations where โฌ๏ธ or โ๏ธ tax โฆ โฌ๏ธ domestic GDP
What is a subsidy?
Subsidy- grant provided by government to encourage production & consumption of ๐/๐งน- imposed on ๐/๐งน with โฌ๏ธ external benefits e.g. education ๐
How is the benefit of a subsidy received by the consumer?
Benefit of subsidy received by consumer in the form of โฌ๏ธ price
How is the benefit of a subsidy received by the producer?
Benefit of subsidy received by producer in the form of โฌ๏ธ production costs
What are the evaluation points of a subsidy?
๐- โฌ๏ธ alternative forms of economic activity e.g. renewable energy- create โฌ๏ธ pollution- promotes sustained economic growth & reduces external costs e.g. pollution
๐- opportunity cost- โฌ๏ธ government spending elsewhere or โฌ๏ธ taxes
๐- external benefits internalised so social optimum level achieved
๐- unintended consequences e.g. firm dependence on subsidy-> inefficient production
What is a maximum price?
Max price- set below market equilibrium price by government
What are the characteristics of a max price?
- Limit price โฌ๏ธ- make ๐/๐งน cheaper e.g. protect exploitation of tenants
- Causes shortages/excess demand- ๐/๐งน cheaper
- Max price set above โฌ๏ธ market equilibrium price- โ๏ธ effect
What are the evaluation points of a max price?
๐- โฌ๏ธ exploitation of consumers & allow โฌ๏ธ income ppl afford essentials e.g. rental ๐
๐- unintended consequences- government intervention distorts price mechanism as excess demand remains due to โฌ๏ธ price & price โ๏ธ be bid up due to price cap โฆ shortage
๐- โฌ๏ธ inequality- salary cap on โฌ๏ธ paid workers
๐- shadow (๐ด) markets could be created- ppl pay โฌ๏ธ for ๐/๐งน to ensure they obtain it
What does a maximum price diagram look like and what do the annotations mean?
See bottom of page 20 economics theme 1 notes
What is a minimum price?
Min price- set above market equilibrium price by government
What are the characteristics of a min price?
- Limit price can โฌ๏ธ- make ๐/๐งน expensive e.g. income protection-min wage
- Causes surplus /excess supply- ๐/๐งน expensive
- Surplus created purchased by government agency at guaranteed minimum price
- Min price set below โฌ๏ธ market equilibrium price- โ๏ธ effect
What are the evaluation points of minimum prices?
๐- โฌ๏ธ consumption of harmful ๐ e.g. ๐ท, ๐ฌ etc-> โฌ๏ธ demand -> producers switching to healthy drink๐ฅค & food ๐ production
- BUT if demand inelastic then min price โฌ๏ธ effective
๐- โฌ๏ธ ๐ & ๐ฅค prices-> hardship for low income consumers
๐- guaranteed min price scheme-> โฌ๏ธ producer incomes-> โฌ๏ธ employment in that sector
- BUT guaranteed min price scheme involves opportunity cost as taxes โฌ๏ธ OR government spending elsewhere โฌ๏ธ
- Guaranteed income-> โฌ๏ธ efficiency because โฌ๏ธ profit incentive to produce โฌ๏ธ quality food etc
๐- surpluses bought by government may be sold over๐ for โฌ๏ธ prices-> outcompete farmers in developing nations
What are tradable pollution permits?
Permits bought & sold in market
When have a tradable pollution permits been used in real life?
Emissions trading system (ETS)- โcap & tradeโ system (nations allocated CO2 permits- divided between firms of nation- tradable between firms)
Why are tradable pollution permits good?
Incentive for firms to invest in clean ๐งผ technology & โฌ๏ธ CO2 emissions
What are the evaluation points of tradable pollution permits?
๐- governments can โฌ๏ธ fund by selling nations reserve permits- ๐ฐ used to clean ๐งผ environment & compensate victims
- BUT if government corrupt then ๐ฐ may be kept
๐- information gap-> too โฌ๏ธ OR too โฌ๏ธ permits issued-> production costs โฌ๏ธ-> โฌ๏ธ international competition-> firms relocate OR โฌ๏ธ/โ๏ธ incentive for firms to โฌ๏ธ pollution
๐- pollution permits & โฆ pollution โฌ๏ธ (2008- ETS carbon allocation โฌ๏ธ by 5%)
๐- firms may pass cost of permits to consumers via โฌ๏ธ prices- โฌ๏ธ likely if demand inelastic
What does a minimum price diagram look like and what do the annotations mean?
See page 21 middle of page 21 economics theme 1 notes
Why does the state provide information?
Information gaps -> market failure โฆ government intervention โฌ๏ธ this
What are 3 examples of state provision of information?
1) Use of social media to promote production & consumption of healthy ๐ e.g. ๐ & ๐
etc
2) Use of social media to discourage production & consumption of unhealthy ๐ e.g. ๐ฌ etc
3) Remind ppl of laws for some protection e.g. seatbelt in ๐ & โ๏ธ to๐ท & ๐ etc