Govt Policies To Achieve Efficient Resource Allocation And Correct Market Failure Flashcards
Q: What is a Pigouvian tax?
A: A Pigouvian tax is an indirect tax imposed on activities that generate negative externalities, equal to the marginal external cost, to make firms pay for the externalities they cause.
Q: What is the purpose of a pollution tax?
A: The purpose of a pollution tax is to correct a negative externality by increasing the price of the product and decreasing the quantity produced, aligning the firm’s costs with the social costs.
Q: What is an ad valorem tax?
A: An ad valorem tax is a tax charged as a given percentage of the price of a good or service.
Q: What is one major problem with imposing a pollution tax?
A: One major problem is accurately measuring the value of the pollution caused, which can lead to government failure if the tax is set too high or too low.
Q: How does the elasticity of a good affect the effectiveness of a pollution tax?
A: If the good is inelastic in demand, producers may pass the tax on to consumers, reducing its effectiveness. If the good is elastic, the tax can encourage a switch to less polluting products.
Q: What are some types of government regulations for monopolies?
A: Government regulations for monopolies include outlawing their formation, forbidding certain monopoly behaviors, ensuring certain standards of provision, and enforcing levels of competition in an industry.
Q: What are property rights in economics?
A: Property rights are socially enforced constructs that determine how resources or economic goods are used and owned, involving individuals, associations, or governments.
Q: What are tradable pollution permits?
A: Tradable pollution permits allow firms to buy and sell the right to emit a certain amount of pollution, providing an incentive to reduce emissions and internalize the externality.
Q: What is a specific tax on demerit goods?
A: A specific tax on demerit goods is an indirect tax imposed to reduce negative consumption externalities, such as passive smoking or road congestion.
Q: How can price controls address negative externalities?
A: The government can impose a minimum price on products that generate negative externalities, increasing the price to consumers and reducing consumption, depending on the product’s price elasticity of demand.
Q: How can the provision of information by the government address market failures?
A: The government can advertise the benefits of merit goods, reducing information failure and encouraging consumers to increase consumption.
Q: What is a production quota?
A: A production quota is a physical limit on the amount that can be produced, potentially raising the price if set at a low level, but may lead to informal market dealings.
Q: How do subsidies and direct provision correct market failures?
A: Subsidies shift the supply curve to the right, reducing price and increasing quantity demanded. Direct provision addresses market failures caused by public goods and positive externalities by providing services like education and healthcare.
Q: What is ‘nudge’ theory in economics?
A: Nudge theory uses behavioral insights to influence decision-making and improve resource allocation, such as using green footprints to reduce littering or displaying healthy snacks to encourage better eating habits.
Q: What are the potential benefits of privatisation?
A: Benefits include improved efficiency, lack of political interference, pressure from shareholders, increased competition, and government revenue from asset sales.
