Government Intervention And Market Failiure Flashcards
Indirect Tax
Increases a firm’s cost of production,
Less incentive to supply as they will earn less profit at any given price,
Supply curve shifts left S1 to S2
Excess demand at the previous market price causes price to increase from p1 to p2
Causing a contraction of demand from q1 to q2
Reducing quantity/ consumption to the more socially optimum level
Evaluate indirect tax
PED likely to be price inelastic, addictive
Habit so the increase in price causes a less than proportionate decrease in quantity demanded
For the indirect tax to have an effect will need to be large.
Rather than putting a strain on the government budget (and having an opportunity cost) An advantage of this is that the government can hypothecate revenue earned into further reducing consumption.
Information provision analysis
Demerit goods reduce consumption
Individuals Understand the harm done
Change tastes and preferences.
Less incentive to buy so the
Demand curve shifts left from d1 to d2. (WHY)??
Excess supply at the previous market equilibrium price lowers the equilibrium price from p1 to p2 causing a contraction of supply from q1 to q2. Reducing the overconsumption
(Q2 is the So and more allocatively efficient)
Minimum floor price
If the market price is too low
above the equilibrium 🌟
Government decides the market price is too low.
Price increases and
No seller can charge below.
As price increases. Changing tastes and preferences
(PE to pMin)
Fewer people willing and able to buy
Contraction of demand (QE to QD)
Excess supply in the long term disentivises firms from producing
Provided the price control is set above the current equilibrium price.
Reduced overconsumption
🎼minimum floor price
government sets a minimum price threshold for it to be sold at.
This means fewer people are willing and able to buy, which disincentivises consumption, this causes the demand curve to shift left from QE to QD when price increases PE to PMin as a result of the price control.
This means there is excess supply. Which in the long run would likely disincentivise firms from producing as much alcohol.
To have any effect the minimum price must be set above the current equilibrium price. If it is, the overconsumption of alcohol will be reduced
🙁requires monitoring cost
Cost of intervening may exceed the benefits gained
Resulting in government failure through excessive administration costs
Also, black markets are likely to emerge
Will need regulating, policing, effective punishments.
Black markets may lead to more negative externalities like
Regressive, inequitable
Information provision- alcohol
Government provides information
to educate on the harm
Changes tastes and preferences away from alcohol by teaching them about the dangers
Demand curve shifts left D1 to D2
Equilibrium price falls P1 to P2
Contraction of supply from Q1 to Q2
Social optimum
Information provision- subsidise e cigs
Info- target children
Show them the harm done by smoking
Shifting the demand curve left from d1 to d2
Excess supply and competition between sellers lowers the equilibrium price causing a contraction of supply from Q1 to Q2 where Q2 is the socially optimum quantity.
Correcting the overconsumption.
Information provision analysis
Opportunity cost - promote, distribute
Easily be ignored cannot be legally enforced
Risk the cost of intervening exceeds the benefits gained
Government will need accurate and up to date information
Risk of government failure
Merit good information provision
Understand benefits
Change tastes and preferences
Less incentive for consumers to buy
Demand curve shifts right from d1 to d2
Excess demand at the previous market equilibrium price causes price to rise from p1 to p2
Extension of supply Q1 to Q2
Q2 is SO
correcting underconsumption
Imperfect information
Can’t make fully informed or rational decisions
Potential source of market disliked
Eg legal jargon- miss allocation of merit and demerit goods
Subsidy evaluation
Effectiveness depends on PED
if inelastic, fall in price from the subsidy will cause a less than proportionate increase in quantity demanded.
Will need to be large.
Increasing the opportunity cost.
Next best alternative forgone by the government increases..
Hard to know the exact size of the subsidy required. Requires a value judgement from the policy maker (government) to accurately measure the externalities associated and put a monetary value on it.
Risk of gov failure-
gov intervention leads to an allocatively inefficient outcome
Subsidy analysis
Lower cost of production
At any given price suppliers will earn more profit
Have more of an incentive to supply and the supply curve shifts right from s1 to s2
Competition with sellers at the previous market price causes the equilibrium price to decrease from p1 to p2, and this causes an extension of demand from Q1 To Q2.
Increasing quantity supplier to the social optimum and correcting the underconsumption
Regulation
Legally enforced
Production more expensive for firms or reducing consumption
Demand side regulation:
Changing tastes and preferences
Fewer people willing and able to buy at any given price
Demand curve shifts left
Expensive to supply;
Indirect tax analysis
Info provision analysis demerit
Understand harm
Change tastes and preferences
Less incentive to buy d1 to d2
Lowers equilibrium price from p1 to p2
Contraction of supply q1 to q2
Q2 is so
Merit good info provision analysis
Understand benefits
Change tastes and preferences
More incentive to buy
Demand right d1 to d2
Increases equilibrium price from p1 to p2
Extension. Of supply from q1 to q2
Q2= PO
Corrects underconsumption
Maximum price analysis
