Government Intervention & Failure Flashcards
Define ad velourm tax
a tax that is based on the value of a product or service, rather than on the quantity or weight of the item
What policies can be used to combat the housing market issues?
- help to buy scheme (so it is easier for first time buyers to get on the ladder)
- surcharges for people buying second homes (increase in stamp duty)
- rent control (max prices)
Define stamp duty
A tax due if you purchase land/property over a certain price
Outline a max price diagram
Axis: price, quantity
Curves: supply, demand
Max price dotted line: horizontally along the diagram (near the bottom)
Plots:
- P,Q
- Qd: where demand meets q
- Qs: where supply meets q
- space between Qd &Qs = excess demand
Outline a min price diagram
Axis: price, quantity
Curves: supply, demand
Min price dotted line: horizontally along the diagram (near the top)
Plots:
- P, Q
- Qd: where demand meets q
- Qs: where supply meets q
- space between Qd & Qs = excess demand
What government policies can help merit goods?
- subsidies
- regulation
- provision of information
- maximum prices
Outline the main reasons governments intervene
- redistribution of income & wealth
- support firms (& help them remain competitive)
- collect tax revenues
- achieve macroeconomic growth
- correct market failure
What do free market economists think of gov intervention?
Should be extremely limited (as market forces are often more reactive)
What is the opinion of other economists on gov intervention?
Gov should intervene in all areas of the economy to ensure the most effective & equitable distribution of resources
Define market based policies
The government taking action to affect the conditions of s/d
Define non market based policies
When governments directly intervene in the market
Outline some common types of intervention
- indirect taxes
- subsidies
- price controls
- state provision
- regulation
- property rights
- pollution permits
Outline the categories of government intervention
- public expenditure
- taxation
- price controls
- legislation & regulation
What do indirect taxes do?
Increase the cost of production on firms
Outline the diagram for indirect taxes
Axis: price, quantity
Curves: supply, demand
- supply shifts left to become S1 + tax
(The boxes are all cut off by Q2)
- Box A (indirect taxes the consumer pays) is between P1 & P2
Box B (indirect taxes the producer pays) is between P1 & P3
Welfare loss
How much less has the producer received (graphically) when indirect taxes are imposed?
The decrease from P1-P3
What is the tax revenues the government receives (graphically) from indirect taxes
(P2-P3) x Q2
What are the evaluation points of indirect taxes?
- effectiveness depends on the PED of the g/s
- may lead to the creation of illegal markets (as consumers seek to avoid paying taxes)
Define government failure
When the costs of government intervention outweigh the benefits of intervention
What is the end result of gov failure
Worsening of the allocation of scarce resources leading to the harming of social welfare
Outline the main causes of gov failure
- Information failure, valuing externalities effectively (politicians may not be knowledgeable enough to make effective decisions)
- High costs (enforcement & admin)
- Unintended concequences (black markets,impact on poor & firms, firms taking th piss w subsidies)
