Microeconomics 2.11 Government Intervention Flashcards
Direct taxation
Amount levied on a business or an individual that must be paid to the government
Indirect taxation
Amount levied on a producer to increase the cost of a product.
Indirect tax and inelastic PED
There would be high prices with the burden on the consumer and smaller reduction in the quantity demanded
Indirect taxation and elastic PED
There would be a small price rise with most of the burden with the producer and a greater change in the quantity demanded.
Subsidy
Amount paid to a producer to a business to produce goods or services.
Subsidy and elastic PED
Small change in price and greater proportionate change in quantity demanded
Government expenditure
Also known as public spending. Governments collect taxes and then spend on different government departments in different ways.
Areas of government expenditure
Social security, health, defence, education, public debt, public order and safety, housing and the environment, transport, industry, agriculture and employment.
Government faces opportunity cost
Between decisions to spend tax payers money on different public spending projects.
Price ceiling
Maximum price
Price floor
Minimum price
Example of a minimum price
Price for unit of alcohol in Scotland
Example of maximum price
Rent controls, bus fares
Buffer stock system
System of holding and releasing stock to maintain a market price despite supply fluctutations.
Criticism of buffer stock systems
Cost of storage; not all goods can be stored; government information failure on setting the market price.
Public Private Partnerships
Joint initiative between government and producers in order to increase supply to a market.
Private Finance Intitiative
a funding arrangement under which the private sector designs, builds, finances and operates an asset (e.g. a school) for the public sector in return for an annual payment linked to its performance in delivering the service.
Contracting out
When the public sector places activities in the hands of a private firm and pays for the provision.
Competitive tendering
A process where the public sector calls for private firms to bid for a contract.
Pollution permit system
System for controlling pollution based on a market for permits that allows firms to pollute up to a limit.
Example of a pollution permit system
EU Emissions Trading System
Advantage of pollution permits
Sets a limit and gives firms the incentive to reduce emissions.
Disadvantages of pollution permits
Cost of policing the system and government failure on number of permits to issue.
Property Rights
By issuing property rights, this can lead to those in the market trading to reach a socially optimal output. By the economist Ronald Coase
Coase theorem
Externalities could be internalised in the market where property rights can be enforced and there are limited transaction costs and smaller number of parties.
Information Provision
The government provide information to correct information failure e.g. information on second hand cars or on demerit goods.
Regulation and legislation
Where the government declares goods illegal or sets clear rules around the market of certain goods.
Competition Policy
Competition and Markets Authority- regulation to protect consumers and reduce market power of some firms.
Government failure
a misallocation of resources arising from government intervention that causes a less efficient allocation of resources and imposes a welfare loss on society.
Regulatory capture
The firms operating in the market know more than the government and so can manipulate the government to increase the market failure.
Moral hazard
Firms in the market know the government will protect them so engage in riskier behaviour e.g. banks investment
Lack of profit incentive
Government intervention can remove the profit incentive and so firms don’t work as efficiently
Misallocation of resources
Governments allocate too many or too few resources to supplying a good or correcting a market failure.
Information failure
The government does not have access to perfect information and so allcoate resources inefficiently
Cost of intervention
Adminstrative and other costs use tax payers money and can be more expensive than the private market.
