government intervention in markets Flashcards
if a company is producing to many pollutants when creating their product , what could the government do ?
government could impose a tax on production. Firms will respond by producing less because their costs of production have now risen due to tax.
where does the level of tax need to be set
so that negative externalities are eliminated and the MSC=MSB
What tax is appropriate to impose if the MPC and MPB are not parallel and why
an ad valorum tax such as VAT as the amount of tax paid in money terms rises as price rises
What tax is appropriate to impose if the MPC and MPB are parallel
a specific tax like duty on petrol in the uk
what are the 3 reasons why indirect taxes are difficult to impose
1- difficult to target - G does not know the exact size of market failure or the impact a tax will have on the market
2- conflicting motives- raising revenues and reducing market failure conflict each other when deciding size of tax
3- mistrust of government justification- tax is unpopular example - 1990s UK G was forced to abandon a plan to raise the rate of VAT on gas and electricity because of political opposition. The G claimed to want to raise the rate to reduce greenhouse gas emissions
define subsidy
a grant given which lowers price of a good, usually designed to encourage production or consumption of a good.
what are the 3 main problems with subsidy’s
1- Targeting - too big too small
2- Conflict with policy objectives - subsidy’s can increase inflation and the ability of lower income family’s to heat their homes.
3. Difficult to remove - when receiving a subsidy a family’s income effectively increases , if subsidy is decreased of removed they can lobby government to delay or abandon plans to change the subsidy
what is an example of a riot that has occurred over removing a subsidy
attempts to remove the subsidy on basic fuel or foods in countries such as Iran, Venezuela or India have caused major riots in the past and in some cases government’s have been toppled as a result
does maximum price create a shortage
YES
when is a maximum price used
when people cannot afford basic necessities such as food and housing
where must a maximum price be set
must be set below the normal free market equilibrium price to have any effect on price and output
what negative consequence can occur due to maximum prices
black unofficial markets if quantity is restricted then some consumers will be willing to pay a higher unofficial price so producers can extract extra consumer surplus at a higher price
what is rentcontrol
example of maximum pricing
it is legally enforced method of maximum pricing to make the cost of renting houses or flats more affordable
rent control limits the amount a landlord can can charge for letting out a house.
acts as a price ceiling as it prevents rents from being charged above a certain level
what does minimum pricing attempt to do ?
attempt to correct market failure by raising their price to a level where MSB and MSC are equal
