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Economics AS (Microeconomics) > Government Intervention to Correct Market Faliure > Flashcards

Government Intervention to Correct Market Faliure Flashcards

1
Q

What are the main forms of Government Intervention?

A
  • Indirect Taxation
  • Subsidies
  • Provision of Information
  • State Provision
  • Regulation
  • Tradable pollution permits
  • Extension of property rights
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2
Q

Define Indirect taxation?

A

A tax levied on goods and services which increases the cost of production

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3
Q

Market failures corrected by Indirect taxation?

A
  • Overproduction

- (overconsumption)

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4
Q

Examples of indirect taxation?

A
  • Fuel
  • Liquor
  • Cigarettes
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5
Q

Analysis and effects of indirect taxation?

A
  • 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
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6
Q

Positives of Indirect taxation?

A
  • 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
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7
Q

Negatives of indirect taxation?

A
  • 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
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8
Q

Define subsidy?

A

A payment, usually from the government to encourage production or consumption of a product

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9
Q

Market failures corrects from subsidies?

A
  • Under production

- (Under consumption)

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10
Q

Examples of subsidies?

A
  • Universities
  • Farming
  • Transport services
  • Winter fuel allowance
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11
Q

Analysis and effects of subsidies?

A
  • 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
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12
Q

Positives of Subsidies?

A
  • Reduce pollution levels
  • Increase choice for consumers
  • May increase employment
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13
Q

Negatives of subsidies?

A
  • 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
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14
Q

What does effect of subsidies depend on?

A
  • Size of subsidy

- Elasticity of demand

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15
Q

Define Provision of Information?

A

Providing information about goods and services

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16
Q

What market fairies does provision of information correct?

A
  • Over consumption

- Underconsumption

17
Q

Examples of provision of information?

A
  • Health warnings on cigarette packages
  • NHS leaflets
  • Government adverts and campaigns
18
Q

Analysis and effects if provision of information?

A
  • 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
19
Q

Positives of Provision of information?

A

Easy to use with other government interventions

20
Q

Negatives of provision of information?

A
  • Difficult to implement, may be opposition
  • Can be expensive
  • Slow
21
Q

What does the effect of provision of information depend on?

A

-How many people see it

22
Q

Define state provision?

A

-The provision or supply of something from the state

23
Q

Market failures corrected by state provision?

A
  • Under consumption

- (under production)

24
Q

Examples of state provision?

A
  • Free milk
  • NHS
  • Transport
  • Healthy foods
25
Q

Analysis of effects of state provision?

A

-The state will provide merit goods winch will correct the positive externalities and will achieve the social optimum

26
Q

Negatives of state provision?

A

-Expensive

27
Q

Define Regulation?

A

Regulation is the setting of laws, standards and controls to influence production and/or consumption to correct failure

28
Q

Market failures corrected by regulation?

A
  • Over consumption

- Overproduction

29
Q

Examples of regulation?

A
  • Health and safety standards
  • Age restrictions
  • Wage restrictions
30
Q

Positives of regulation?

A
  • Sets clear standards that are easy to understand
  • Instant effect
  • Backed by the law
31
Q

Negatives of regulation?

A
  • 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
32
Q

Effect of regulation depends on?

A
  • The more you regulate the more you have to police
  • Size of regulation
  • If the amount of policing is worth the regulation
33
Q

Define tradable pollution permits?

A

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

34
Q

Examples of tradable permits?

A

-EUETS (EU Emissions Trading System)

35
Q

Positives of tradable permits?

A
  • 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
36
Q

Negatives of Tradable permits?

A
  • What is the appropriate optimal level of pollution?
  • Large firms may afford to buy more pollution permits than small firms which lead to a monopoly
  • Fines must be introduced to those who pollute beyond their quota.
  • Trading of permits may affect the geographical distribution of pollution
  • Hard to operate when many countries are involved.

Economics AS (Microeconomics) (9 decks)

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