Market Failure 2.11 Flashcards
What are taxes
compulsory charges imposed by governments on individuals and firms
Two types of taxes
Specific Tax: a fixed amount of tax imposed
Ad Valorem Tax:
Advantages of indirect taxation
-tax rev generated can be used to fund public and merit goods
-reduce quantity demanded for demerit goods (refer to diagram)
Disadvantages of direct taxation
COST OF ENFORCEMENT - difficult to monitor who and who isnt paying taxes
depends on elasticity
if tax too high - discourages firm to supply - below socially optimum level - unemployment
What is a subsidy
A payment to the government to producers of goods and services
Advantages of subsidies
Encourage supply of merit goods
employment higher with childcare subsidies
Disadvantages of subsidies
creates a tax burden for taxpayers
firms become inefficient in production as reliant on state aid
Price controls
government intervene to monitor and regulate price directly
Disadvantages of min and max
min: inefficient allocation of resources due to excess supply - can be used on underprovided goods
max: excess demand black market
advantages of min and max
min: producers have a guaranteed minimum price - encourages investment
max: prevents monopolies exploiting customers - people can purchase more
what is a buffer stock system
stabilising the price of a commodity by buying excess supply when supply is high and selling when supply is low
What are tradeable pollution permits?
a system for controlling pollution based on a market for permits that allows firms to pollute up to a limit
Further explanation of tradeable permits
permits can be bought and sold to what is seen as an acceptable level of pollution
incentive for firms to reduce pollution to sell off permits
advantages of tradeable
incentive for firms to pollute less as they can sell permits
pollution levels can be reduced over time
Disadvantages of tradeable
unsold permits wasting
cost of policing an enforcing - calculating and distributing permits to polluters
