government intervention to correct market failure Flashcards
What are the main forms of Government Intervention?
-Indirect Taxation -Subsidies -Provision of Information -State Provision -Regulation -Tradable pollution permits -Extension of property rights
Define Indirect taxation?
tax on consumer expenditure
Market failures corrected by Indirect taxation?
overconsumption
Examples of indirect taxation?
-Fuel -Liquor -Cigarettes
Analysis and effects of indirect taxation?
-The tax imposed should equal the value of the negative externality. -The producer is required to pay the tax in full, which therefore takes into account the negative externality. -The supply curve shifts to the left, and the social optimum is achieved
Positives of Indirect taxation?
-The polluter pays, leading to a socially efficient outcome -Raises substantial tax revenue for the government and helps fund public or merit goods -It is a market solution to the problem of the negative externality
Negatives of indirect taxation?
- It is difficult to calculate accurately the tax required to correct the negative externality.
- Producers may be able to pass on the tax to consumers if demand is price inelastic, thus, output will not really be reduced.
-Higher prices may be inflationary and reduce competitiveness of the country
-Administrative costs involved -Taxes in one country may force business to relocate to another, which could lead to unemployment
-Tax evasion
-No overall cap on emissions
Define subsidy?
A payment, usually from the government to encourage production or consumption of a product
Market failures corrects from subsidies?
under production
Examples of subsidies?
-Universities -Farming -Transport services
Analysis and effects of subsidies?
-The subsidy encourages producers to produce more reducing production costs.
-The supply curve shifts to the right and the positive externality is corrected. And the output achieved will be the social optimum.
-The size of the subsidy should equal the size of the positive externality
Positives of Subsidies?
-Reduce pollution levels
-Increase choice for consumers
-May increase employment
Negatives of subsidies?
- High cost on government
- May lead to money diverted away from other items
-Companies may become too reliant on government support and they may not try to improve their efficiency
-Long time to implement
What does effect of subsidies depend on?
-Size of subsidy
-Elasticity of demand
Define Provision of Information?
Providing information about goods and services
What market fairies does provision of information correct?
- Over consumption
- Underconsumption
Examples of provision of information?
- Health warnings on cigarette packages
- NHS leaflets
- Government adverts and campaigns
Analysis and effects if provision of information?
-It will discourage people to overconsume demerit goods, thus correcting the negative externality and achieve the social optimum
-It will also encourage people to consume merit goods, thus correcting the positive externality and achieving the social optimum
Positives of Provision of information?
Easy to use with other government interventions
Negatives of provision of information?
-Difficult to implement, may be opposition
-Can be expensive
-Slow
What does the effect of provision of information depend on?
-How many people see it
Define state provision?
-The provision or supply of something from the state
Market failures corrected by state provision?
under consumption
Examples of state provision?
-Free milk
-NHS
-Transport
-Healthy foods
Analysis of effects of state provision?
-The state will provide merit goods winch will correct the positive externalities and will achieve the social optimum
Negatives of state provision?
-Expensive
Define Regulation?
Regulation is the setting of laws, standards and controls to influence production and/or consumption to correct failure
Market failures corrected by regulation?
- Over consumption
- Overproduction
Examples of regulation?
Health and safety standards -Age restrictions -Wage restrictions
Positives of regulation?
-Sets clear standards that are easy to understand -Instant effect -Backed by the law
Negatives of regulation?
-Difficult to set the correct standards -Costs of policy and enforcement -Avoidance and evasion -Poorly targeted -Can detract foreign investors and business and make them go to less regulated countries, which could lead to unemployment
Effect of regulation depends on?
-The more you regulate the more you have to police
-Size of regulation
-If the amount of policing is worth the regulation
Define tradable pollution permits?
A permit which allows the owner to emit a certain amount of pollution and which can be sold to another polluter if it is not required
Examples of tradable permits?
-EUETS (EU Emissions Trading System)
Positives of tradable permits?
-The polluter pays
-Encourages firms to improve production methods
-Permits are traded between polluters and in theory requires minimal monitoring
-Overall level of pollution can be controlled and the permits can be reduced
-Can be used among many countries
