Micro 1.4 Flashcards
What is indirect taxation?
A tax imposed on goods with negative externalities to prevent market failure.
What happens to the supply curve when indirect taxation is introduced?
It shifts from S1 to S2, increasing costs to the individual.
What is the free market equilibrium position represented by?
P1Q1, where MPC=MPB.
What is the social optimum position where social welfare is maximized?
P2Q2, where MSB=MSC.
What is the effect of introducing a tax on social welfare?
It internalizes the externality and maximizes social welfare.
What are the advantages of indirect taxation?
- Internalizes externalities
- Raises government revenue
- Potentially makes goods more elastic
What are the disadvantages of indirect taxation?
- Difficult to determine the size of the externality
- Conflict between revenue raising and solving externality
- Creation of black markets
- Ineffectiveness if demand is inelastic
- Politically unpopular
- Regressive nature
Name some examples of indirect taxes used in the UK.
- Landfill taxes
- Fuel duties
- Alcohol duties
- Tobacco duties
- Air passenger duties
- Sugar taxes
What do subsidies aim to achieve?
They aim to correct positive externalities and information gaps.
What is the effect of subsidies on the supply curve?
It shifts the supply curve to the right, lowering the cost of production.
What is the social optimum output where welfare is maximized after introducing a subsidy?
P2Q2.
What are the advantages of subsidies?
- Reaches social optimum output
- Encourages small businesses
- Promotes equality
- Encourages exports
What are the disadvantages of subsidies?
- High opportunity cost
- Difficult to target
- Can cause inefficiency in producers
- Difficult to remove once established
Name some examples of subsidies provided by the government.
- Biofuels
- Solar panels
- Apprenticeship schemes
- Wind farms
- Rail industries
What is a maximum price?
A legally imposed price that suppliers cannot charge above.
What must a maximum price be set below to have an effect?
The current price equilibrium.
What is a minimum price?
A legally imposed price that the price of a good cannot go below.
What must a minimum price be set above to have an effect?
The current price equilibrium.
What are the advantages of maximum and minimum prices?
- Consideration of externalities
- Ensures affordability of goods
- Ensures fair prices for producers
- Can reduce poverty and increase equity
What are the disadvantages of maximum and minimum prices?
- Distortion of price signals
- Excess supply/demand
- Difficulty in setting appropriate prices
- Potential for black markets
- Possible illegal bribes or discriminatory allocation
What is a pollution permit?
A permit allowing the owner to pollute up to a specific amount, with a limited supply controlled by the government.
What happens if companies exceed their pollution limits?
They face legal action.
What is the purpose of tradable pollution permits?
To incentivize companies to cut emissions by using greener technology.
What is the free rider problem?
A situation where public goods are under-provided by the free market due to non-excludability and non-rivalry.
What are public goods?
Goods that are non-excludable and non-rivalrous.
What is government failure?
When government intervention leads to net welfare loss and misallocation of resources.
What are some causes of government failure?
- High administration costs
- Inefficient production
- Regulatory capture
- Distortion of price signals
- Unintended consequences of policies
What is the impact of excessive regulation?
It may reduce competition and efficiency.
What is the role of government in providing information?
To allow consumers to make informed decisions and to force companies to provide information.
What are some examples of information provision by the government?
- Labels on cigarette packages
- Information campaigns on health issues
- Consumer protection laws
- Traffic light system for food
What is the effect of asymmetric information in markets?
It leads to market failure, prompting government intervention to provide information.
What are unintended consequences in government interventions?
Effects that the government did not intend to happen
This can occur when consumers and producers react unexpectedly to new policies.
What was the intended purpose of the buffer stock scheme CAP in the EU?
To smooth out price fluctuations
The scheme unintentionally led to overproduction and falling agricultural prices globally.
What was an unintended outcome of the buffer stock scheme CAP?
Overproduction in the EU and a fall in agricultural prices in other parts of the world
EU surpluses were disposed of at cheap prices outside of Europe.
What impact did NHS patient treatment targets have?
Reduction in the quality of care
This was not the government’s intention when introducing the targets.
What are information gaps in government decision-making?
Limited data available for decision-making
It is impossible to predict certain variables accurately, such as the number of cancer patients.
What is a consequence of inaccurate cost and benefit forecasts?
Welfare loss due to investments with higher costs than benefits
Governments often struggle to gather all necessary information for accurate forecasts.
Fill in the blank: Excessive _______ costs can hinder effective government interventions.
administration
High administrative costs can divert resources from intended outcomes.
True or False: The government can always accurately predict the number of cars on the road.
False
Predicting such variables is impractical and often impossible.
