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A-Level Economics Year 1 > Government intervention- TB > Flashcards

Government intervention- TB Flashcards

1
Q

What are taxes?

A

Compulsory fees levied on individuals or firms by government

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2
Q

What is indirect tax? + example

A

A tax levied on expenditure (spending) on goods or services e.g. VAT

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3
Q

What is direct tax? + example

A

A tax charged directly to an individual based on a component of income e.g. income tax

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4
Q

What is incidence of tax?

A

The way in which the burden of paying a sales tax is divided between buyers & sellers

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5
Q

What is specific tax? + example

A

A tax of a fixed amount imposed on purchases of a commodity e.g. council tax

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6
Q

What is ad valorem tax? + example

A

A tax levied on a commodity set as a % of the selling price e.g. VAT

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7
Q

What is excess burden of a sales tax?

A

The deadweight loss to society following the imposition of a sales tax

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8
Q

What is polluter pays principle?

A

An argument that a firm causing pollution should be charged the full external cost that it inflicts on society

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9
Q

What do ad valorem taxes do to a supply curve?

A

Shifts left and make PeS more inelastic

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10
Q

What are taxes most heavily put onto & why?

A

Demerit goods- internalise negative externality & payment for external & private cost

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11
Q

What is hypothecation?

A

Spending tax revenue in the same area in which the revenue was generated

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12
Q

What does specific tax do to supply & demand curves?

A

Shifts S curve left & contraction in demand

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13
Q

Where is consumer burden after a shift due to a tax?

A

Area of rectangle inside P1, up to P2, Q2 (at equilibrium on S2/MSC and at meeting to P1)

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14
Q

Where is producer burden after a shift due to a tax?

A

Area of rectangle inside P1, down to P3, Q2 (at meeting on S1/MPC and P1)

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15
Q

How does tax reduce market failure?

A

Makes new equilibrium of demerit goods closer to social optimum where MSB=MSC- more allocatively efficient

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16
Q

Where is welfare loss on a tax diagram?

A

Area of triangle pointing left from vertical line from Q1 to S2/MSB to P2Q2

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17
Q

If PeD is 1) inelastic and 2) elastic who bears more of the tax?

A

1) Consumer
2) Producer

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18
Q

If PeD is 1) elastic & 2) inelastic what effect does a tax have on QD?

A

1) Larger fall in QD
2) Smaller fall in QD

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19
Q

What does tax effectiveness depend on? (judgments too)

A

1) The size
2) PeD elasticity

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20
Q

What are 2 advantages of using a tax?

A

1) Market based solution
2) Raises revenue- can be hypothecated

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21
Q

What are 3 disadvantages of using tax?

A

1) Hard to value negative externalities
2) Redistribution effects- lower income more effected
3) Collection issues- expensive

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22
Q

What is a subsidy?

A

A grant given by the government to producers to incentivise production of a good or service

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23
Q

What goods tend to be subsidised?

A

Goods with positive externalities- Merit goods

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24
Q

What do subsidies do?

A

Lower the price of a product as they act as extra revenue- increasing demand & supply

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25
Q

What does a subsidy do to supply & demand curves?

A

Shifts S curve right & an extension in demand

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26
Q

Where is producer gain after a subsidy?

A

Area of rectangle P1-P2-Q2

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27
Q

Where is consumer gain after a subsidy?

A

Area of rectangle P1-P3-Q2 (bottom left point is new equilibrium)

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28
Q

What does a subsidy do to price on a diagram?

A

Falls from P1 to P3

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29
Q

If PeD is 1) elastic & 2) inelastic how effective are subsidies?

A

1) More effective
2) Less effective

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30
Q

What is state provision/ government expenditure?

A

Where the government decides which goods or services to provide & spends money providing them

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31
Q

What are 3 examples of state provision?

A

1) Armed forces
2) Roads
3) Healthcare

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32
Q

Who could provide the goods/ services in state provision?

A

The government or private companies

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33
Q

What are 4 reasons that governments use state provision?

A

1) Increase consumption of merit goods
2) Ensure public goods are produced/ consumed
3) Reduce inequality of access due to (lack of) wealth
4) Redistribute income

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34
Q

What is the correct level of state provision?

A

it is a value judgement

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35
Q

What are 2 advantages of state provision/ government expenditure?

A

1) Reduces inequality
2) May support macro objectives

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36
Q

What are 4 disadvantages of state provision/ government expenditure?

A

1) Expensive for government= high opportunity cost
2) No market disciplining producers- missing markets
3) Encourages dependence- reliance on state provision
4) Reduces innovation- no invisible hand

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37
Q

What does a state provision diagram look like?

A

Supply curve big shift right to S2, large extension in demand

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38
Q

What is government spending per unit on a state provision diagram (using points on diagram)?

A

Area of P3 to new equilibrium, to P2 across to S1

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39
Q

What is a price control?

A

A legal maximum or minimum price

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40
Q

What is a price floor?

A

A legal minimum price

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41
Q

What is a price ceiling?

A

A legal maximum price

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42
Q

What are 3 examples of a price floor?

A

1) Minimum wage
2) Alcohol minimum unit pricing
3) Farming product

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43
Q

What is an example of a price ceiling?

A

Rent control

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44
Q

What does a maximum price do?

A

Increases consumption & utility as the good or service is more affordable

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45
Q

When would a maximum price have no impact?

A

If it is set above the equilibrium price

46
Q

When would a maximum price lead to excess demand and a shortage?

A

If it is set below the free market equilibrium

47
Q

What does a minimum price do?

A

Increases: Production, the price producers receive and Producer Profits

48
Q

When will a minimum price have no impact?

A

if it is set below the equilibrium price

49
Q

When would a minimum price lead to excess supply and a surplus?

A

If it is set above the free market equilibrium

50
Q

What does a minimum/ maximum price diagram look like?

A

Normal D&S graph and a horizontal line for min or max price

51
Q

What are 2 advantages of maximum prices?

A

1) Cheap for government to impose
2) Reduces monopoly power

52
Q

What are 3 disadvantages of maximum prices?

A

1) Shortage reduces production
2) Rationing may ensue
3) Black markets

53
Q

What are 2 advantages of minimum prices?

A

1) Encourages investment
2) Stockpiles can mitigate impact of severe weather

54
Q

What are 3 disadvantages of minimum prices?

A

1) Lowers utility
2) High opportunity cost
3) Allocative inefficiency

55
Q

Why does a maximum price compare unfavourably to a subsidy?

A

Max prices fail to increase consumption as producers reduce production

56
Q

Why does a minimum price compare unfavourably to a tax?

A

Tax raises revenue & improves allocative efficiency more

57
Q

What is a merger?

A

Two or more firms joining to form a new firm

58
Q

What is a cartel?

A

An illegal agreement between firms on price and/or output with the intention f maximising their joint profits

59
Q

What is competition policy?

A

A form of regulation used to protect consumers and firms from being exploited by firms with market power

60
Q

What is a competition policy’s main functions?

A

1) Investigate mergers that could lead to a ‘substantial lessening of competition’
2) Assess markets where there may be competition problems
3) Investigate abuse of dominant position
4) Protect consumers
5) Prosecute cartels

61
Q

What are 2 advantages of competition policy?

A

1) Cheap
2) Threat of enforcement

62
Q

What are 2 disadvantages of competition policy?

A

1) Regulatory capture- CMA becomes too close to firms under investigation
2) Size- unclear

63
Q

What is a buffer stock?

A

A scheme intended to stabilise the price of a commodity by buying in periods of excess supply and selling when supply is low

64
Q

Why may a buffer stock be used?

A

When the price of a commodity is volatile

65
Q

What can cause a shortage?

A

Drought, disease, war etc

66
Q

What can cause surpluses?

A

Favourable weather conditions

67
Q

What are 2 advantages of buffer stocks?

A

1) Market based solution- incentivises production
2) May be self-funding

68
Q

What are 2 disadvantages of buffer stocks?

A

1) Limited deployability
2) May be expensive- unpredictable

69
Q

What 2 reasons do buffer stocks compare favourably to a subsidy?

A

1) Cheaper and self-funding
2) Market-based solution- not dependent on subsidies

70
Q

Why 2 reasons do buffer stock compare unfavourably to subsidy?

A

1) Cost to purchase surplus may be unaffordable- unpredictable price
2) Buffer stock increases price in a surplus year

71
Q

What are legislations?

A

Laws created by government to enforce regulations

72
Q

What are regulations?

A

Rules created by government to control activities of producers and consumers by changing their behaviour

73
Q

What is prohibition?

A

An attempt to prevent the consumption of a demerit good by declaring it illegal

74
Q

What are 4 things regulations do?

A

1) Influence demand or supply for/of a good or service
2) Can restrict the sale of demerit goods
3) Offer producers and consumers protection
4) Set minimum environmental standards

75
Q

What does prohibition cause on a S & D diagram?

A

Big shift left in supply

76
Q

What are 2 advantages of regulations?

A

1) Regulations are cheap to create
2) Regulations can be self funding- fines

77
Q

What are 4 disadvantages of regulations?

A

1) Regulations can be difficult to set- too weak or strong
2) Regulations increase firms’ costs
3) Regulations can be expensive to enforce
4) Regulations may require international agreement

78
Q

What 2 reasons do regulations compare favourably to a tax?

A

1) If allocative efficiency=0, prohibition leads to 0 consumption more than tax
2) If the behaviour doesn’t have a price on it, taxes cannot work

79
Q

What 2 reasons do regulations compare unfavourably to a tax?

A

1) Taxes raise more revenue
2) Easier to predict, measure & understand costs imposed by a tax

80
Q

What is information provision?

A

When the government educates the public to help consumers make better choices

81
Q

What is information provision a solution to?

A

Information failure

82
Q

What are 2 advantages of information provision?

A

1) Cheap to implement
2) Pervasive

83
Q

What are 4 disadvantages of information provision?

A

1) Ineffective against irrationality (e.g. addicts)
2) Limited impact- other forms of market intervention needed
3) Loopholes- Firms can find ways around laws
4) Complex

84
Q

Why does information provision compare favourably to legislation?

A

Can be imposed quicker at a lower opportunity cost

85
Q

Why does information provision compare unfavourably to legislation?

A

Larger size of market failure tackled with legislation

86
Q

What is a pollution permit system?

A

A system for controlling pollution based on a market for permits that allows firms to pollute up to a limit

87
Q

What is polluter pays principle?

A

Argument that a firm causing pollution should be charged the full external cost that it inflicts on society

88
Q

What are property rights?

A

Legal control or ownership of a good

89
Q

What are 3 examples of tradable pollution permits?

A

1) EU emissions trading system
2) California zero emission vehicle program
3) Regional greenhouse gas initiative

90
Q

Who issues or sells pollution permits to firms & what do the permits do?

A

The government, allows firms to pollute up to a limit

91
Q

What will less polluting firms do with their pollution permits?

A

Sell them to firms who require more pollution permits

92
Q

What do pollution permits incentivise & how?

A

Firms to lower pollution by financially rewarding firms who have lower pollution & financially punishing firms with higher pollution

93
Q

What can be lowered to put pressure on firms to lower pollution?

A

The cap (cap and trade)

94
Q

What are 2 advantages of tradeable pollution permits?

A

1) Creates market based incentives
2) Overall level of pollution is controlled

95
Q

What are 2 disadvantages to tradeable pollution permits?

A

1) Must be enforced- expensive or difficult
2) Complex to create and operate

96
Q

What are 2 disadvantages to tradeable pollution permits?

A

1) Must be enforced- expensive or difficult
2) Complex to create and operate

97
Q

What 2 reasons do tradeable pollution permits compare favourably to a tax?

A

1) Incentivises firms to lower pollution more inexpensively
2) Firms know the best way for them to cut pollution

98
Q

What 2 reasons do tradeable pollution permits compare unfavourably to a tax?

A

1) Correct number of permits difficult to determine
2) Third parties not compensate for the external costs incurred from pollution

99
Q

What is contracting out?

A

A situation where the public sector places activities in the hands of a private firm & pays the whole provision

100
Q

What is competitive tendering?

A

When the public sector calls for private firms to bid for a contract for provision of a good or service

101
Q

What is a public-private partnership?

A

When a government service or private business venture is funded and operated through a partnership of government & the private sector

102
Q

What is a private finance initiative?

A

A funding arrangement here the private sector designs, builds, finances and operates an asset and associated services for the public sector in return for an annual payment linked to its performance

103
Q

Why might a government have a private firm design, build or operate a service?

A

Better expertise available & less pressure to keep costs low

104
Q

What are 2 advantages of public-private partnerships?

A

1) Competition lowers costs
2) Risk shared by private & public sector- aligned incentives

105
Q

What are 2 disadvantages of public- private partnerships?

A

1) Health & safety issues- private sector less likely to prioritise safety or service standards than the government, to increase profits
2) Borrowing costs higher in private sector

106
Q

What 2 reasons do public- private partnerships compare favourably to… and what are they?

A

1) Competition in tendering can lower costs- unavailable in other provision’s
2) Private sector expertise could lead to lower costs and improved quality
Both hypothetical

107
Q

What 2 reasons do public- private partnerships compare unfavourably to… and what are they?

A

1) Few firms can deal with the complexity of large PFI contracts- little competition
2) PF2 ended- drawbacks outweighed the advantages
Actual- evidence based

108
Q

What is government failure?

A

A misallocation of resources arising from government intervention- causing a less efficient alloctaion of resources & imposes a welfare loss on society

109
Q

What are 5 consequences of the government intervening beyond the social optimum?

A

1) Incur opportunity costs
2) Reduce private sector investment
3) Increase unemployment
4) Reduce consumer choice
5) Cause unanticipated behaviours/effects

110
Q

What are 2 causes of government intervention?

A

1) Low quality information
2) Regulatory capture

111
Q

What are 2 consequences of government failure?

A

1) Inequality- low income households more likely to be harmed
2) Society worse off than before

112
Q

How large are the risks of government intervention (judgement gvnmt failure)?

A

Chance of society being worse off with government intervention is low- gvnmt can correct failing policies with new info= temporary issues

A-Level Economics Year 1 (10 decks)

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