Government Microeconomic Intervention 3 Flashcards
What is market failure?
when the free market (esp the market mechanism) does not make the best use of scarce resources and it’s prices are too high.
e.g.: lack of public goods, info failure, underproduction of merit goods, overproduction of demerit goods.
What are the consequences of market failure?
government intervention take different forms to produce greater social equity and equality.
What is an imperfect market?
a market with inefficient production with consumers unable to make informed choices.
How do governments intervene in markets?
1) by addressing the non-provision of public goods
2) addressing the overconsumption of demerit goods
3) addressing the underconsumption of merit goods
How does government correct these market failures?
governments take over the market mechanism in order to allocate resources adequately and provides more affordable alternatives.
how do governments control the prices in markets?
1) The government sets maximum prices, whereby sellers
are restricted from selling products above said price
ceiling.
2) The government can set minimum prices to sell at (i.e. for
farmers) to protect the incomes of essential sectors.
Define Incidence
the extent to which the tax burden is borne by the producer/ consumer/both.
What is ad valorem?
A tax element used by retailers to add an additional sum to the price at the final transaction which is paid by the consumer.
What happens when indirect taxes are imposed?
Tax are imposed on the producer to discourage the production of demerit goods. This forces producers to raise the prices of the taxable goods, causing a left shift in the supply curve.*
The extent that the tax burden is borne by the consumer, by raising the price, depends on the PED of the taxed product.
what is meant when demand is price elastic?
Essentially, consumers are more sensitive to price changes and will significantly alter their buying habits if price fluctuates.
What are some forms of government interventions?
1) Indirect tax
2) Subsidies
3) information campaign
4) behavioral theories
what are subsidies?
direct payments from the government to the producer of goods and services.
Name at least 4 reasons why subsidies are given.
Anything similar to:
1) help for more equitable distribution of
income
2) keep prices of necessary goods down
3) encourage consumption of merit goods
4) raise producer income
5) allows exporters to sell more goods
6) reduce dependance on imports by paying
to domestic producers
What are some factors limited the effectiveness of subsidies?
1) interferes with the workings of the
market mechanism
2) give rise to implications for opportunity
cost (conflicting demand for funding)
3) takes away form the limited gov revenue
from tax
4) introducing a direct provision, could cause demand to fall
How can direct provision of goods and services lower inequality in an economy?
Governments can provide goods free of charge at the point of use, because of available finance through tax revenue. Consumption of these goods by the poor allows them to retain a higher percentage of their income.
What factor can cause the provision of public goods to be inefficient?
The cost of producing public goods are financed the the tax revenue. Yet, the costs of producing the same good could be lower in the private sector, because of competition in the market.
Define maximum price
a fixed price for essential goods which the market price cannot usurp (price ceiling)
What must be remembered in regards to maximum price control?
Maximum prices are only valid when it is below the normal equilibrium determined by the free market.
What must be remembered in regards to minimum price control?
minimum price is only valid when it is above the normal equilibrium price set by the free market.
Define minimum price
a fixed price that the market price cannot recede.
What is the minimum price used to enforce?
1) the declined use of demerit goods
2) the wages of certain jobs
3) the strain of imports that are similar substitutes of locals goods.
Define buffer stock scheme
a type of commodity agreement to limit and smooth the price fluctuations.
what is meant by implementing structural reform?
putting into action policies designed to fundamentally change the underlying structure/fabric of an economy, often by addressing market inefficiencies, removing barriers to entry, and improving the regulatory framework, with the goal of increasing economic growth and competitiveness by making it easier for businesses to operate and for resources to be allocated more efficiently
What does Buffer stock schemes do?
government policy designed to stabilize the price of a commodity by buying up excess supply when prices are low and selling from reserves when prices are high, essentially acting as a shock absorber against price fluctuations and benefiting both producers and consumers by mitigating extreme price volatility.
