Govt Intervention Flashcards
1
Q
Possible reasons for govt inervention
A
- Earning govt revenue
- Supporting firms (domestic?), households on low incomes
- Influencing levels of production (limiting producer power?)
- Influencing levels of consumption (encouraging consumption of merit goods, discouraging consumption of demerit goods)
- Correcting market failure
- Promoting equity (redistribution of wealth)
2
Q
Main forms of govt intervention
A
- Price controls (ceilings [max prices] and floors [min prices])
- Indirect taxes + subsidies
- Direct provision of services
- Command and control regulation + legislation
3
Q
Price ceiling/cap
A
- Max price, set below the market price, that a seller is allowed to charge for a particular good/service by law: govt has determined that the equilibrium price is too high (price must be lower so people can afford the good/service)
- A form of market regulation used to ensure that firms do not abuse their market power by charging consumers excessively high prices (particularly for goods which are considered a necessity [ex. water, electricity, food, rent])
- Often only used temporarily in exceptional situations such as during times of war, famine or after natural catastrophes (ex. during the COVID-19 pandemic, some countries established price ceilings for hand sanitizer after observing extreme increases in the price for this product)
*New equilibrium quantity demanded and quantity supplied: shortage = excess demand (see diagram)
4
Q
Price ceiling impacts
A
- Producers: Sell a lower quantity at a lower price and may need to reduce employment (less being produced)
- Consumers: Pay a lower price, but there’s less available to buy
- Govt: May be a popular move if price benefit outweighs shortage impacts
- Workers: Lower producer quantity and rev may lead to unemployment
- Society: Shortages—some people don’t get product, and this can result in underground or parallel markets (black market); non-price rationing (lines, coupons, or favoritism); under-allocation of resources to that good (allocative inefficiency); and welfare loss
5
Q
Price floor
A
- Min price, set above the market price, that a seller must charge for a particular good or service by law: govt has determined that the equilibrium price is too low and must be higher so producers can make sufficient profit (often used w/ food and wage prices)
- A form of market regulation used to provide income support to producers
- Often only used temporarily in exceptional situations such as when there is a bumper crop (abnormally large harvest) of an agricultural good: they are also seen in the case of employee wages for lower skilled workers through the policy of a minimum wage
*See diagram
6
Q
Price floor impacts
A
- Producers: Sell a higher quantity at a higher price
- Consumers: Pay a higher price for a lower quantity
- Govt: Likely that it becomes the buyer of the surplus
- Workers: Can benefit if higher demand and producer revenue leads to job creation
- Society: Excess supply needs to be absorbed (long term issues); production inefficiency (limited incentive to minimize costs); overallocation of resources to that good (allocative inefficiency); and welfare loss (MC > MB)
7
Q
Minimum wage impacts
A
- Labor surplus = excess supply = unemployment
- Illegal workers at wages below the minimum wage
- Misallocation of labor resources (changes signals in market and prevents market from working as intended)
- Misallocation in product markets (firms dependent on unskilled labor see an increase in costs [leftward shift in S])
8
Q
Solutions for excess supply
A
- Govt could purchase excess supply and store—this could be used in the future if there is a shortage to increase supply (it could be given to those on low incomes for free/at a reduced price as part of a redistributive policy)
- Govt could purchase excess supply and destroy it (huge cost and waste/inefficiency)
- Govt could purchase excess supply and sell at a lower price to other countries (dumping): could lead to retaliation and a country imposing trade barriers
- Govt could set a quota which would force prices up to the min price (but this defeats the objective of giving producers more rev [may also lead to informal markets, hard to enforce])
- Govt could increase demand through advertising/protectionist policies against foreign substitutes
9
Q
Direct tax
A
Tax on income or profit (ex. income tax, corporation tax)
10
Q
Indirect tax
A
Tax imposed on expenditure/ consumption (ex. a sales tax). Two types: specific and percentage/ad valorem (see diagram).
11
Q
Tax purposes
A
- Increase in tax rev for govt
- Income redistribution
- Reduction in consumption of harmful goods
- Improved allocation of resources by reducing negative externalities
*differs as a % of total rev for countries…
12
Q
Specific tax
A
A specific (fixed) amt of tax that is imposed upon a product (ex. N500 per unit): this will shift the supply curve up/to the left by the amount of the tax.
13
Q
Percentage/Ad valorem tax
A
Tax is a percentage of the selling price: as the price increases the amount of tax increases and so the supply curve will shift up/to the left and be tilted away from the original supply curve.
14
Q
Indirect tax impacts
A
- Producers: Sell a lower quantity at a lower price
- Consumers: Pay a higher price and able to buy less
- Govt: Receives revenue
- Workers: Potentially lose if reduced producer revenue leads to job losses
- Society: Under-allocation of resources to that good (allocative inefficiency); producer and consumer surplus reduced; welfare loss (part of both the producer and consumer surplus is transformed into government revenue [but MB > MC, so welfare loss is to to less being consumer than socially optimal])
15
Q
How who pays the share of the indirect tax may differ
A
- PED and PES impact the sharing of the burden of an indirect tax between consumers and producers: the group with the more inelastic response pays a higher share of the tax
- When PED < PES, the tax incidence is mainly on consumers; when PES < PED, the tax incidence is mainly on producers
*see diagram…
