Microeconomics (Gov. Intervention) Flashcards
What challenges sustainability
resource overuse
How effective are government interventions?
To varying degrees in different real-world markets
What are the three concepts that get threatened when there’s market failure?
Equity, efficiency, sustainability
Outline the reasons for gov intervention
- to gain revenue (obvious example — tax)
- support firms (subsidies)
- support low-income households (provision)
- influence level of production (make firms produce more or less) (taxes and subsidies)
- influence level of consumption (make households spend more or less) (taxes and subsidies)
- correct market failure
- promote equity
Why does gov. need revenue
To promote equity by:
influence econ. activity by improve overall standards of living:
- redistribution of wealth
- correct market failures
Outline the sources of gov. revenue
-
Tax
-> Direct tax: levied from incomes and wealth
-> Indirect tax - imposed on spending (e.g. on unhealthy things) - Sale of goods and service (e.g. bake sales)
-
Privatization proceeds - sales of state-owned enterprises and government-owned assets
e.g.: Gov sold Meralco to a private person - Sovereign wealth funds (SWF) - state-owned investment funds
- Public sector borrowing (government bonds)
How do govs support firms?
- Subsidize firms
- Tax concessions (reducing taxes/removal of taxes)
- Protect new businesses by
- tariffs (taxes on imported goods)
- quotas (limit on no. of imported goods)
- subsidies
- admin barriers (gov)
- Business development loans (so like subsidies?)
- Research and development funding
- Financial bailouts (so like subsidies for bankruptcy??)
- saving a business from bankruptcy if gov deems company too big to shut down (e.g. lots of taxes and large no. of employees)
How does the gov. support low-income households
- gov funding for providing necessities (funding)
- Income redistribution via tax and expenditure policies
- Transfer payments - using tax revenues to promote income equity. Redistributes income
- (unemployment benefits for unemployed, state pensions to support elderly people)
How does the gov influence the level of production?g
- regulation and indirect taxes on certain goods
- regulation and legislation to ensure consumers can make informed decisions
-> avoiding information asymmetry - gov expenditure to enable more socially desirable goods and services to consumers
- e.g.: Making it cheaper for private hospitals to operate
- directly providing the services and goods needed
Define information asymmetries + Gov’s role in it
Information advantage held by EITHER consumers or producers.
Gov wants to make sure they’re both informed
How do govs prevent market failure [REVISE CARD, UNRELATED WITH TITLE]
Part 2:
- underprovision of econ goods and services (e.g. inadequate healthcare)
- econ activity has external/non-monetary costs called negative externalities
Define negative externalities
external costs that are not monetary (e.g. pollution) that have no compensation to third parties
Outline the main forms of government intervention
- Price controls: Price ceilings, etc.
- Indirect taxes and subsidies
- direct provision of services
- command and control regulation and legislation
- consumer nudge
Describe price controls
- government regulations establishing a maximum price to be charged for certain goods and servicess
Describe price ceilings in graphs and purpose
It is the maximum price set below equilibrium price — meaning the limit on to how high the price can be.
- low price -> below equilibrium price -> high demand and low supply (due to the effect of price ceilings)
A type of price control that limits the maximum price to encourage output and consumption (law of demand)
- Done to protect consumers from soaring prices
What is the unintended effect of price ceiling according to this graph? (ADD PHOTO)
shortage
Outline the effect of price ceilings to the consumer and producer surplus (ADD PHOTO)
The consumer surplus > the producer surplus because in this scenario, the consumer gets more benefit
Explain “dead-weight loss”/“welfare loss
Because the price is no longer at equilibrium, so there’s a loss to society
- e.g. im the price ceilings, there’s a loss of benefit to producers so there’d a dead weight loss.
Describe food price controls
Purpose: to make food more affordable to low-income owners
How?: They can set up a price ceiling to make sure food is more accessible
Outline the concept of non-price rationing
Rationing methods that don’t involve prices (e.g. queues)
Describe the price-control of price floors
- The limit of how low a price can be charged — the point above the equilibrium point/price
- In the labor market, this is done by imposing a minimum wage
- to benefit producers/firms
Describe the effect of price floors in the context of the labor market (increasing minimum wage)
Remember: in the labor market, the households are the firms whereas the suppliers/firms are the “consumers”
- Demand for workers v = ^ Supply of workers (dead weight loss)
- worker motivation (supply) ^ but firm willingness to pay v (demand). Therefore, there would be a surplus
- If the firms cannot pay the workers anymore, they’ll have to do layoffs (unemployment)
Describe the price control of indirect taxes
Imposed on producers but they often pass it on to consumers in the form of higher prices (unintended effect)
- For both producers and consumers
Define specific tax
A type of indirect
charged a fixed amount
Ad valoerm tax
Indirect tax that is a percentage tax on the value of a good/service
Graphing Indirect Tax
-> There will be a shift in the supply curve
- ^ indirect tax = ^ product cost = shift to the left supply curve
Impact: Higher market price and lower demand (law of demand)
Graphing Specific Tax
Graphing Ad Valorem Tax (PRICE INELASTIC)
”Pivotal Shift” = the change in the gaps between the two supply curves (DOUBLE CHECK)
NOTICE: if there is a shift due to a government intervention, specify the type of gov intervention as a superscript to the Letter of curve (e.g. S+tax for the addition of indirect tax)
THE SQUARE IS THE GOV REVENUE
What will the effectiveness of indirect taxes depend on?
PED and PES
- if PED is relatively inelastic as there are a relative lack of substitutes (so firms won’t have to increase their cost too much)
- to not throw off the market equilibrium
Explain this graph and the possible effect of the tax to the firms of this good/service
The good is price elastic as shown thru the shallowness of the demand curve.
- Due to this, consumers would look for other firms
- And then the tax burden/tax incidence would be more on the producers as they’re losing their customers due to the higher prices and elastic demand
Outline some of the types of subsidies
1.) medical subsidies / direct provision (..?)
- e.g. free vaccinations (given by ppt)
2.) Subsidized interest rates
3.) Healthcare subsidies
4.) Agricultural subsidies
5.) Export subsidies
6.) Discounts
- gov will shoulder the reduced price
Graphing subsidies
Shift of supply curve to the right
Define tax burden/tax incidence
The effect of a particular tax to the economic welfare
What are the disadvantages of subsidies
- less competition between firms (less innovation because they’re already funded by gov — recall the invisible hand of competition coined by Adam Smith)
- less government funds
- opportunity costs for direct provision of public goods or other forms of promoting equity (basically those funds can go to other means for equity)
- negative externalities (remember its abt 3rd parties) such as pollution
Break down the subsidy graphs (CONT.)
Describe the direct provision of services
Direct provision occurs when the government engages in the provision of a good directly
- a measure to correct market failures caused by public goods or negative externalities and information asymmetry
- chargeable (w/ pay) or ‘free’ (but remember opp cost)
For example, the Singapore government does not produce the face masks it provides directly in times of severe haze.
Nutribun
Command and Control (CaC): Regulation and Legislation
direct laws stating what is permitted and illegal.
Outline the examples of CaC Reg and Legis
- minimum age laws
- environmental protection laws
- outlawing tobacco advertising in mass media
- healthcare warnings on demerit goods (e.g. the dangers of smoking)
Why does the government not outright ban cigarettes
1.) Healthcare benefits from patients
2.) The government benefits from tobacco tax
3.) Tobacco farmers will be unemployed
How to solve for the costs of CaC?
Multiply the percentage to the units and then get the product and multiply it to the unit cost.
To get the total cost add all totals.
What is the consumer nudge theory
The practice of influencing the choices that people make
Who are choice architects and what do they do?
Create nudges using small prompts to influence socioeconomic behavior without taking away their choice — a subtle push.
In government interventions, the choice architects are the government
What are consumer nudges
subtle ways to influence consumer choices
Outline the examples of nudge theory
- people are motivated by timely personalized messages
- e,g,: “thank u to the students who submitted on time 😊 “
- making use of online tech to encourage recycling or other practices
- speed cameras to prompt motorists to drive slower in Parañaque, Sucat
- Trends
Describe this graph (the relationship between elasticity and tax incidence)
1.) Define the terms
2.) Explain the different points and movements of the graph
3.) Evaluation
When will there be a dead-weight loss?
After government intervention — but generally when there’s market disequilibrium
Because, there’s no loss of benefits prior to gov. intervention when there’s a market equilibrium
Define dead-weight loss
It is the unused resources due to market inefficiency. It only occurs when market is NOT in equilibrium
e.g.:
