government microeconomic intervention Flashcards
provision of public goods
as private sector may have no interest in providing
over-consumption of demerit goods and under-consumption of merit goods
due to lack of information available to the consumers
controlling prices in the markets
setting maximum and minimum prices
market failure
when markets do not allocate their resources efficiently
indirect tax
a tax levied on goods or services rather than on persons or organisations
- used to discourage the production and consumption of demerit goods
effects of indirect tax
- government introduces tax to producers
- firms will gain less profit
- supply curve will shift left
- new equilibrium will be formed
- quantity supplied decreases as the demand is now lower
PED elastic demand for indirect tax
- producers pay more
- if producers placed the tax burden on consumer then small increase in price will cause a large fall in the Qd
PED inelastic demand for indirect tax
- consumers pay more
- an increase in price from the effects of the indirect tax will result in little/no change in the Qd
benefits of using indirect tax
- revenue generation
- wider tax base
- influence behaviour of consumers like demerit goods
- clear market to reach new equilibrium
- control inflation as it can reduce demand and help stabilise prices
drawbacks of using indirect tax
- reduce the competitiveness in the market
- distort market prices and consumer choices = inefficiency in allocation of resources
- higher costs for consumers
- difficult for gov. to set the amount of tax that is best for society (too high/low will not achieve this)
- regressive and takes higher income proportion from the poor
- domestic firms less competitive with imports and international
subsidy
money paid by government to producers in order to reduce cost of production
effects of subsidies
- cost of production decreases
- profit increases
- forms will produce more
- supply shifts right
- new equilibrium formed at P2Q2`
PED elastic for subsidies
- mainly fall on producers
- lower prices = people may buy more but only a little bit
PED inelastic for subsidies
- mainly fall on consumers
- lower prices = buy alot more
direct provision meaning
a way to reduce income inequality in society by providing goods/services for free of charge using tax revenue
provision of information meaning
government funded information by provision/advertising/education to discourage the consumption of certain goods
advantages of direct provision
- ensures provision of public goods
- increases provision of merit goods
- improves equality
- accessible for all income groups
disadvantages of direct provision
- high costs to tax payer
- opportunity cost
- inefficiency due to lack of competition
- may crowd out private sector provision
advantages of provision of information
- educational campaigns can reduce demand for demerit goods
- consumption can be reduced
- consumers make rational decisions and act rationally
disadvantages of provision of information
- high costs of campaigns
- if ineffective = demand for good not changed
- effectiveness will depend on PES as consumers may not be sensitive to the change in prices
- may work in the long run as it will take time for information to be absorbed
- long time for people to see the advert repeatedly
maximum prices meaning
a fixed price ceiling enacted by the government usually set below the equilibrium- so market price cannot exceed
advantages of maximum prices
- poor people can afford
- increases consumption of merit goods
- CS rises
disadvantages of maximum prices
- reduces revenue and profit
- shortages
-queues or waiting list so opportunity cost can be spent elsewhere - black markets
- set above equilibrium price = not effective
minimum prices definition
fixed price floor enacted by government usually set above the equilibrium market price
