government intervention in markets Flashcards
purpose and methods of government intervention, government failure
purpose of government intervention
to correct market failure and increase total welfare
methods of intervention (8) TRES SIMPPS
indirect taxation
subsidies
maximum and minimum prices
tradable pollution permits
extension of property rights
state provision
regulation
provision of information
effect of indirect tax (2)
- this can raise revenue for government spending, discourage excessive consumption of demerit goods
- can earn tax revenues, thus fund public goods and other costs
effect of subsidies (2)
- can incentivize production of socially desirable goods
- can make necessary goods cheaper
effect of maximum and minimum prices (2)
- can ensure essential goods remain affordable (minimum wage) or prevent price gouging during emergencies.
- help producers or to decrease consumption of a demerit good
effect of provision of information
empowers consumers to make informed choices and can indirectly influence market behavior
effect of property rights extension
can incentivize responsible management and investment in those resources, factors of production will be used more efficiently
effects of state provision (of public goods)
ensures access and potentially reduces costs compared to private provision.
effects of tradable pollution permits (2)
incentivizes efficient pollution reduction creates a market for emissions.
effects of regulation (2)
protect consumers and the environment, and promote fair competition
how are minimum prices used in labor market
to protect workers from wage exploitation. These are called minimum wages
evaluation of indirect taxes (2)
- It is difficult to measure external cost (EC) in terms of money, then it is hard to
identify the proper level of tax on pollution or tax on demerit goods. - Producers may pass on tax to consumers rather than reducing pollution
evaluation of subsidies (2)
- It has an opportunity cost to government.
- It increases tax burden to next generation and it creates government debt.
evaluation of maximum price (2)
- Shortage or excess demand (Disequilibrium)
- Maximum prices can lead to black market
evaluation of minimum price (2)
- There will be excess supply or surplus (Qs - Qd)
- It needs government help to buy surplus. (Qs - Qd)