gpt cant make flashcards
Governments intervene in markets for the following reasons (5)
**Earn revenue through indirect taxes
Providing support to firms **(eco - friendly / small firms / merit goods)
This can be done through subsidies and price floors
**Provide support to households on low income **
(subsidies / price ceilings / transfer payments / direct provision)
**Influence the level of production in firms (Increased with subsidies and reduced with taxes)
Influencing levels of consumption in households** (merit / demerit goods)
Changed by taxes / subsidies / direct provision / nudges / command & control
Market failure (3)
Refers to the failure of the market to achieve allocative efficiency, the market produces quantities of a good or service that are too large or too small in relation to what consumers wanted. Additionally the goods are are socially desirable are not produced by the market.
In order to correct market failure the** government must intervene** and does so by methods like price controls, indirect taxes, nudges, direct provision, and command & control methods.
**Governments also redistribute income through price control methods in order to promote equity. **
Price controls (2)
Price control: Refers to the setting of a maximum or minimum price by the government. This is so that prices are unable to adjust to their equilibrium level determined by demand and supply.
Price controls result in market disequilibrium, excess in demand or supply causes shortages and surpluses. They do not allow a new equilibrium to be formed.
Price ceiling
Maximum price set by the government below the equilibrium. The legal price of a good sold cannot exceed the price at which the ceiling is set, this is usually done to make the good more affordable for consumers with low incomes
Consequences for price ceiling (5)
Shortage: not all the buyers at are willing and able to buy the good are able to do so since there is excess demand and limited supply.
Non price rationing methods
Underground / parallel markets: Involve buying / selling transactions that are unrecorded and usually illegal. This arises usually when people buy a good at the maximum legal price and sell it illegally at a higher price. This is because many consumers are dissatisfied that they could not purchase the product, and are willing to pay higher prices
Underallocation of resources relative to the social optimum
Negative welfare impacts:
consequences for stakeholders price ceiling
Consumers: Party gain and partly lose (they gain area c and lose area b)
Some consumers that bought the good at a lower price are better off as they saved money, but some consumers didn’t get to buy the good at all and are hence dissatisfied.
Producers: Are worse off with a price ceiling, losing area c and d.
They sell a smaller quantity, hence the revenue drops from Pe into Qe to Pc x Qs
Additionally there is welfare loss
Workers: Fall in output from Qe to Qs means some workers will be fired, they will be worse off.
Government: No gains are losses, might gain popularity from consumers that bought it at cheaper prices
consequences of rent control (4)
- shortage of housing
- poorly mainted
- market for rent above legal maximum
- long lines
food price controls consequences
shortage
underground market
falling incomes - more unemployment
popularity for govt
Why are price floor used?
Protect farmers: Provide them income support so that they goods they sell are above the market equilibrium, allowing them to earn more profit and stay in business
Protecting low wage workers: Offering them a wage above the level determined in the market.
Consequences of price floors
Surpluses: If the government did not buy the surplus the price would fall back to equilibrium level because firms would have excess output with no buyers. They would have to lower the price in order to stay in business and sell the surplus
Govt measures to dispose of surpluses:
Store it: additional storage costs + purchase costs
Export it abroad: Give a subsidy to producers so they sell the good at a lower price
All options are problematic
Inefficiency arises to due lack of pressure and competition
Negative welfare impact
Consequences for stakeholders for price floor
Consumers are worse off: They pay a higher price for a smaller quantity of it
Producers: Gain as they receive higher prices and produce a greater quantity of the good. They dont face pressure from low - cost competition and they dont face incentives to be efficient
Workers: Gain as the greater production of the good results in increased output
Government: It buys the excess supply and so its a burden on its budget, resulting in less funds to spend elsewhere. These costs to the government are paid by taxes.
Stakeholders in other countries: price floor
Stakeholders in other countries: Surpluses are exported worldwide resulting lower world prices since there is a greater supply. Low prices discourage farmers from producing more.
Consequences of minimum wages on stakeholders
Firms: Worse off (high production costs)
Workers (suppliers of labour): Some gain because they receive a higher wage, but some lose their job (QE-QD). Minimum wage creates additional unemployment (QS-QE)
Consumers: Negatively affected as increase in production costs results in a decrease in supply of products.
keep in mind for minimum wage (3)
Studies say that it a minimum wage if set too high can cause unemployment,
some say that it may have no effect / positive effect on total employment. Some firms maintain the same workers but remove non - wage benefits.
Labour productivity may increase as they are more motivated due to higher wages
All depends on the level of the wages.
reasons for tax (4)
Source of government revenue:
Discourage consumption of harmful goods and services: for demerit goods but this demands on the PED of the product
Redistribute income: Focused on luxury goods so that tax goods can only be afforded by high income earners,
Correcting negative externalities: Improves allocation of resources
Solid Dynamic Revenue Corrector
