Govt. Intervention Flashcards
Explain the reasons for and process of implementing: Indirect taxation
Taxes on expenditure, they increase production costs for producers, and consumption costs for consumers.
2 types:
Ad valorem - Taxes are percentages on consumption, E.g. VAT (20%)
Specific taxes - Tax per unit E.G. Tax per litre of petrol
Reasons for implementing:
Indirect taxes could reduce the quantity of demerit goods. Through upping the price of the good. If the tax is perfect and is equal to the amount of damage per unit, then the MPC becomes the MSC, and therefore the social optimum, leading to the polluter paying the damage.
Process of implementation:
Government policies. If a government wants to internalise the externality then they put an indirect tax upon the good. Forcing the pollutere to pay for the pollution.
The more inelastic the good, the higher the tax revenue for the government due to smaller drop in demand from increase in price.
Define Govt. Intervention
Government Intervention Definition:
Governments intervene in the market in order to correct market failure caused by the free market.
Explain the reasons for and process of implementing: Subsidies
Subsidies:
A payment from the government to a producer to cover their costs of production and encourage them to produce more.
Reasons for implementation:
They encourage the production of merit goods. It includes the full social benefit in the price of the good. Therefore the external benefit is internalised.
Process of Implementation:
If a government wants a sustainable way to be used more, they will give the firm a subsidy of a certain amount, for their prices to be lowered to the consumer and in turn increasing consumption (If the good is elastic) allowing for it to be used more. If the good is inelastic, then the producers gain more, and vice-versa.
Explain the reasons for and process of implementing: Tradable pollution permits
Tradable pollution permits:
Limit the amount of negative externalities, when they are in the form of pollution. Companies can pollute a certain amount and then trade the excess between themselves.
Reasons for implementation:
Benefits the environment in the long run, forcing firms to look to other renewable avenues for producing their goods, in order ot not breach the pollution limit. Also raises more revenue for greener firms as the excess pollution permit they didnt use is being bought by other firms.
Process of Implementation:
Government gives pollution allowance to all companies indivdually. Firms use it to certain extents. If they exceed the limit then, they have to find a company who havent used all of theirs and buy the remainder from them to equal out their excess pollution.
Explain the reasons for and process of implementing: Information provision
Information Provision:
Goverment provides information to make certain their is no information failure. Therefore both firms and consumers do not make uninformed decisions, andtherefore there is no missalocation of resources, leading to market failure.
Explain the causes of Government Failure
Distortion of price signals:
* Subsidies change price signals which signal the consumers what to buy and what not to. As well as producers on what to produce and what not to. Therefore a subsidy lowering the price of a good can distort these signals. Leadig to a missaocation of resources
* Governments may also end up subsidising a failing industry.
Unintended consequences:
* Actions of consumers or producers have unintended consequences.
* Therefore a governement policy may leaded to unexpected actions from consumers completley undermining the policy.
Excessive Administrative Costs:
* Social benefits of a policy may not be worth the financial cost of implementing the policy.
* Governemnt therefore has to weigh up the price of the policy and the advantages from it.
* E.G. HS2
Information Gaps:
* Some policies have to be decided without perfect information. This is because the government cannot have all the information as it is too hard to get.
* To get the information it might bbe too expensive.
* It is impratiacal for a governemnt to try and gain every bit of information therefore they just have to make assumptions
Evaluate the effectiveness of government intervention in solving a market failure
Effective:
During times of crisis the government can handle and protect the people. Helping to direct resources much better than a free market could do.
Might ensure everyone can access basic neccessities and therfore rules out basic inequality
Society might maximise welfare more than profit, therefore without firms in charge, goverment have to listen to the people
Abuse of monopoly power is prevented and therefore governemnt are protecting the people from the free market.
Evaluate the ineffectivness of Govt. intervention in solving market failure
Ineffective:
Not fully informed on what to produce, or where to allocate goods.
May not meet consumer preferences
Government intervention liomits democracy and freedom.
Evaluate the consequences of government failure
Distortion of price signals:
Consequence of this: Firms may not use subsidy the way in which the government wanted to, leading ot a different type of good getting a lower price, leading to consumers being directed to the lower price good and therefore not boosting the knowledge of the other good.
Unintended Consequences:
Consequences of this: Government policies are useless as prducers/consumers acted in a way the governemnt didnt expect, and therefore the government has misallocated resources.
Expensive Administrative Costs:
Government missalocating resources to a policy that is more expensive than it should be. Leading to higher taxes and therefore lower disposable income for the consumer, leading to higher inequality and therfore a misallocation of resources.
Information Gaps:
Governemnt decides to create policy without full information, leading to the problem of the policy possibly goign wrong and possibly missallocation of resources, possibly causing further market failure.
