Market Failure Flashcards
1
Q
Name 2 Pros of an Indirect Tax
A
- Helps solve Negative Externalities
- Internalises the Externality- No-one pays unfairly
- Promotes allocative efficiency
- Generates Government revenue
2
Q
Name 2 Cons of an Indirect Tax
A
- Higher Costs of Production can be passed on to consumers- potentially causing Inflation
- Reduces Consumer Surplus and increases Deadweight Loss to society
- Inelastic demand leads to unresponsiveness to changes in Price
- Governments do not perfectly internalise the externality every time, due to imperfect information
- Unintended consequences, like black markets, unemployment, ‘Brain-Drain’
- Regressive nature of the tax
- Government Failure arguments
- Quite paternalistic and invasive, choice falls
3
Q
What are some of the Evaluation points for an Indirect Tax?
A
- PED of the good
- The Government revenue can be used as a ‘hypothecated’ tax, where revenue can further solve market failure
- Policy used in compound, what else can be used?
- What level is the tax set at?
4
Q
Name 2 Pros of a Subsidy
A
- Helps solve Positive Externalities
- Promotes allocative efficiency and societal welfare gains
5
Q
Name 2 Cons of a Subsidy
A
- Cost of the Subsidy to the Government, Government Failure
- Spending cuts and increased taxation or debt interest
- Opportunity Cost of Providing this subsidy
- Governments often under-subsidise or over-subsidise due to imperfect information, either causing reliance on the subsidy or not correction
- No guarantee that firms will act in the way that this is intended
- Inelastic demand means people won’t drastically increase consumption
6
Q
What are some of the Evaluation points for a Subsidy?
A
- PED of the Good
- Opportunity Cost of Government spending
- Policy used in compound, what else can be used?
- What level is the subsidy set at?
7
Q
Name 2 Pros of Regulation
A
- Non-Market based approach, thus when the Market mechanism has failed, this is useful
- No dependence on PED
- Can solve any kind of Market Failure
- Allocative efficiency and welfare gain
8
Q
Name 2 Cons of Regulation
A
- Costly to enforce the regulation
- The administrative cost of creating the regulation
- Unintended consequences like ‘Brain-Drain’, unemployment, increases costs, black markets, cheats of the regulation
- Government Failure argument
9
Q
What are some of the Evaluation points for Regulation?
A
- Level the regulation is set at
- Policy used in compound, what else can be used?
- Is there strong enforcement of Regulation?
- Value judgement on the level- what’s ‘Fair’
10
Q
Name 2 Pros of a Minimum Price (Price Floor)
A
- Reduces the consumption of demerit goods
- Ensures that consumers aren’t harmed by price changes
- Internalised Externality
- Allocative efficiency and societal gain
11
Q
Name 2 Cons of a Minimum Price (Price Floor)
A
- Regressive nature, increasing the income inequality
- Alternative suppliers cause black markets and smuggling from abroad
- Government loses out as there is a loss in tax revenue
- Unintended consequences, of buying surpluses, leading to Government Failure
- Inelastic good may not properly sort the market failure due to disproportionate fall in Qd
12
Q
What are some of the Evaluation points for a Minimum Price (Price Floor) ?
A
- PED of the good
- Government failure arguments
- Policy used in compound, what else can be used?
- Has to be set at the right level
13
Q
Name 2 Pros of a Maximum Price (Price Ceiling)
A
- Encouraging more consumption of a merit good
- Helps people get necessities
14
Q
Name 2 Cons of a Maximum Price (Price Ceiling)
A
- Creates a shortage due to excess demand
- No thought for people who cannot obtain this good
- Government failure
- Unintended consequences such as black markets
- Cost of enforcing the Maximum Price
- Cost to retain this excess
- Opportunity Costs
15
Q
What are some of the Evaluation points for a Maximum Price (Price Ceiling) ?
A
- Government Failure arguments
- Policy used in compound, what else can be used?
- Has to be set at the right level
