Market Mechanism and Government intervention Flashcards
What is an indirect tax
a tax that is levied on goods and services rather than or income (they can be transferred)
what is a direct tax
- taxes levied against individuals or agents that is payed directly to government meaning they cannot be transfered
what are 3 drawbacks of indirect taxes
- Regressive
- can have unintended consequences like black markets
- when supply is inelastic burden will be transferred to consumers
What is a subsidy
Money grant to firms by the government to reduce the cost of production and encourage an increase in output
what are the 4 drawbacks of a subsidy
- no guarantee of money being spent efficiently
- inelastic demand
- lack of information (over/under sub)
- deadweight welfare loss, opportunity cost
How can subsidy’s create a deadweight welfare loss
- if governments artificially increase demand passed MSB
- Tax payers money is used to pay for the extra revenue (graphical representtation)
how can subsidy’s create an opportunity cost
government revenue could be spent on more productive areas of the economy
what are 4 positives of subsidys
- Solve market failure
- improves innovation in market + improves unemployment
- encourage sustainable practices (environmental subsidy)
- improve outcomes for lower classes (inequality)
2 pros minimum prices
- To protect producers from price volatility (farmers)
- Ensures quality
2 cons of minimum prices
- excess supply bought by governement creating a large opportunity cost
- Price flaws are regressive
What is a maximum price
- Price set below equilibrium in order to increase affordability
3 con of maximum prices
- the good will be under consumed
- Reduced quality
- discourages investment
what are negative externalities
- When there is a negative external cost of production or consumption that is not reflected in the price of the good
what are 3 examples of negative externalites
- All forms of pollution
- Public health issues
- overconsumption of natural resources
what is the social cost = too
Private cost + external costs
How can you deduce an externality from external and private costs
- Negative externality in production - Social cost>private cost
- Positive externality in production - Social cost < Private cost
what is a positive externality
where there is benefits to a third party from consumption or production of a good
what is the conditions for positive and negative externalities in consumption
- Positive externality in consumption MSB>MPB
- Negative externality in consumption
MPB>MSP
examples of positive externalities
- scientific research
- Education and healthcare
- Renewable energy
what is a merit good
goods that are more beneficial to consumers than they realize
3 reasons why are merit goods under consumed
- There importance is decided by politicians (funding for education)
- imperfect information and biases
- firms do not incur the benefits to society that they produce therefore they will underprovide them
What is a demerit good
More harmful to consumers than they realize
4 reasons why are demerit goods overconsumed
- Imperfect information/biases
- lack of government prevention
- there negative external cost is not recognized by the free market
- addiction
What too conditions dictate wether a good is a public good
- non rival
- non excludable
What is a non rival good
The good cannot be consumed purely by one agent therefore charging a price does not stop other agents that haven’t paid from consuming it therefore there is no efficient way to price them
Non rival
Quantity available does not dimmish if it is consumed
what is a free rider
An agent that doesn’t contribute to the purchase of the good however wills still use it
Why are public goods not provided by the free market
- Because of the free rider problem no consumer will purchase the good as it does not make economic sense therefore the private market will not produce them therefore there is a missing market
what is a quasi public good
Shows characterisitcs of both public and private goods
what can help make public goods into private goods
technology
What is complete market failure
When the market for a good is not provided even though society values it
what is partial market failure
when the quantity supplied of the good is too much or too little leading to welfare loss
What is government failure
The cost of intervention out ways the benefits
Positives of using indirect tax to solve overconsumption
- revenue for government
- increases welfare
- promotes allocative efficiency
3 Negatives of using indirect taxes to solve market failure
- Price inelastic demand
- lack of gov info (msb =msc)
- They are regressive therefore will increase inequality (crime/blackmarkets)
3 Negatives of using a subsidy to solve a underconsumption
- opportunity cost/deadweight welfare loss
- lack of info (over/under subsidization)
- Price inelastic demand reduces effectiveness
- no guarantee money is spent efficiantly
consequence of over subsidization
- Encourages subsidy dependence
- Corruption (subsidy taken as dividends)
What is a regulation
A rule of law that encourages certain economic agent behavior
What are the two types of regulation
Command - setting of regulation(bans, limits, laws)
control - enforcement of those regulations (enforcement, punishment, education)
2 Positives of using regulation
- Low cost / opportunity cost / can be easily changed
- can be less interventionsist to protect free market outcomes
Negatives of regulation
- Unintended consequences (imperfect information)
- Different industries will have differing ability to deal with regulation
what is State provision
Direct provision of a good or service at the point of consumption
2 factors that determine wether a good should be state provided
- it has to be a merit good
- Serious welfare loss if provision of the good was left to the free market
2 Positives of State provision
- Acessability, equity, efficiancy, welfare
- Protect against shocks from free market
3 negatives of State provision
- When P=0 there will always be excess demand that could put strain on services therefore governments will have to ration demand
- Huge oppotunity cost + inefficiancy
- Unadiquite funding (politcal reasons)
2 pros and cons of using information provision to combat market failure
Pros
- low costs
- low chance of serious failures
Cons
- subject to manipulation
- no guarantee of success
- Time frame of success will be in the long run
What are property rights
Rights that determine how a property or asset can be used and managed
3 ways in which can property rights stop overconsumption.
- Ownership promotes accountability
- internalizing costs
- exclusion of free riders ( reduces tragedy of the commons)
3 cons of a free market
- Market failure
- Inequality
- consumer exploitation
What is the difference between non rivalrous and non excludable goods
Non rivalrous - one persons use of the good will not reduce the amount and availability of others
No excludable - goods that cannot easily exclude people from accessing them even if they haven’t paid
