Microeconomics PT3 Flashcards
where is the tax per unit?
difference between supply curves
subsidy
government expenditure to a firm to encourage lower costs of a good or service
how does a subsidy work
lowers costs of production, lowing price and increasing quantity, changing consumer behaviour
how does a subsidy solve market failure
A subsidy shifts the supply curve to the right and can be justified for goods which offer benefits to the rest of society.
limitations of subsidy
inelastic PED, inefficiency in use of subsidy, negative YED
evaluation of subsidy
size, PED, used with other policy, time period, substitutes, expense
benefits of subsidy
increases production of goods with positive externalities,
benefits of taxation
changes consumer behaviour towards positive externality goods, revenue from taxation can further counteract negative externalities
problems of subsidies
- costs met through taxation
- unintended consequences
- difficult to estimate
subsidy incidence
indicates how the benefit of the subsidy is shared by market participants
how to find producer incidence of subsidy
old supply curve to new equilibrium and up
how does PED affect consumer and producer subsidy incidence
when elastic benefits producers more, when inelastic benefits consumers more
minimum price
set above equilibrium price
why is a minimum price used
tackles negative externalities to contract demand, tackles demerit goods, reduces volatile prices, reduces poverty and inequality
how does a minimum price work
forces price up into disequilibrium, contraction in demand and expansion in supply
how does minimum price differ with PED
inelastic - small excess supply and small contraction in demand
elastic- large excess supply and large contraction in consumption
advantages of minimum price
reduces consumption and therefore reduces welfare loss when targeting negative externalities
producers can take risks and plan investment as they have a guaranteed price
Alcohol:
- Can cut premature deaths, increase productivity, lessens NHS burden
- Can target cheaper, high strength drinks used by younger drinkers.
disadvantages of minimum price
regressive and inequitable, could raise taxes if combating negative externalities, PED, unintended consequences, incomes may be rising, substitute switch
maximum price and diagram
A maximum price means firms are not allowed to set prices above a certain level. The aim is to reduce prices below the market equilibrium price.
draw diagram
when could maximum price be used
Maximum prices may be most useful in the case of a monopoly who is both restricting supply and inflating prices.
encourage consumption of merit goods, ones which suffer from information failure or promotes factor mobility, target monopoly firms, improves basic living standards
how does a maximum price work
lowers price, excess demand, contraction in supply
advantages of maximum price
- The advantage is that they will lead to lower prices for consumers.
- This may be important if the supplier has monopoly power to exploit consumers. For example, a landlord who owns all the property in an area can charge excessive prices.
- Maximum prices are a method to bring prices closer to a ‘fair’ and ‘competitive equilibrium.
Maximum prices are usually reserved for socially important goods, such as food and renting.
disadvantages of maximum price
create shortages, creating competition and waiting lists, consumers may find alternative supplies, maximum price lowers profits of producers lowering investment, if it is not being enforced then producers overprice
evaluation of maximum prices
government could exclude those who can clearly afford the good, set max price, PED/PES, other policy measures, affect on producer and consumer surplus
issues with price volatility
creates uncertainty, increases risk, lowers investment
cause of price volatility
inelastic PED and PES
buffer stocks and draw the diagram
stabilises the price of a commodity by buying excess supply and selling when supply is low
advantages of buffer stocks
fairness,
farmers have not been pushed into poverty and consumers’ welfare has increases,
stable prices maintain incomes increasing incentive for legal crops to be grown,
enables capital investment for productivity,
positive externalities sustaining rural communities, the government can gain revenue
disadvantages of buffer stocks
cost of buying excess supply are high if there are a series of good harvests, guaranteed Pmin might cause over-production and surpluses causing economic and environmental costs, requires start-up capital, stock may be perishable, high administrative and storage costs, may encourage inefficiency
evaluate buffer stocks
how easy good perishes, series of good/bad harvests, cost of maintaining the scheme, excess supply may be dumped on other countries, international approach may be beneficial
addressing information failure
information provision through health warnings, industry standards, consumer protection laws, advertising campaigns, performance league tables
evaluating information provision
targeting, consistent, addressing the cause of the problem, cost of provision, nanny state, use with other policies
legislation
prevent the supply of a good through making and enacting laws
regulation
government intervention in a market to change the production of a good, limiting or encouraging the supply
how can regulation affect production costs
increase in COP reduces quantity traded and moves towards Qso, reducing market failure
advantages of regulation
quickly introduced with fines to generate revenue, simple to understand and quicker than tax, fairer than taxes, still effective if demand is inelastic/elastic
disadvantages of regulation
costly to introduce and danger of non-compliance, firms pass on costs to consumers, taxes better way of collecting government revenue, depends on the cause of market failure, prohibition encourages underground economy, excessive regulation leads to firm relocation
regulatory capture
the regulator acts in the interest of the producer than the consumer, leads to high prices, low consumer welfare and low restrictions
why does regulatory capture occur
lack of regulatory resources, existence of asymmetric information, regulators work closely with firms
private finance initiative
finance and investment by private firms into the public sector, which is then sold to the public sector
advantages of PFIs
introduces competitive element, firms are profit driven and leads to efficiency, upfront costs are paid by the private sector meaning the government can expand infrastructure with low short term costs, which are later paid for by economic growth, dynamic efficiency, private sector is more innovate and have more expertise so produce more quality
disadvantages of PFIs
private sector has less incentive to pay attention to health and safety issues or quality, poor value for money with high charge as the cost of provision is higher than would be if had been state-funded, risk of failure and collapse, debt costs
how do PFIs (private finance initiative) work?
contracting out where activities are fully placed with the private sector, competitive tendering through bidding for contracts, public-private partnerships
reasons for government provision
equality, public goods, education, shift consumer behaviour, environment, monopoly power, infrastructure
equality government provision
in a free market there will be inequality and poverty and to correct unfair advantages governments can intervene to provide a base level of equality of opportunity through education and a protection against poverty through benefits and a minimum wage to increase net economic welfare, also prevents unrest
education government provision
merit good is underprovided by the free market leading to improvements in quality of life as better skilled workers can earn higher incomes and create positive externalities, in the long run improves productivity and economic growth
shift consumer behaviour
reduces consumption of demerit goods causing private and external costs. consumer behaviour can be changed through tax etc to reduce government spending on areas such as police and healthcare
disadvantages of government intervention
government failure, lack of incentives, political pressure groups, less choice, impact on personal freedoms
government failure government provision
can further cause welfare loss through imperfect information or short term political considerations which causes more harm than good
lack of incentives government provision
without price mechanism, individuals do not have profit motive, leads to inefficiency and slows in economic growth as productivity does not increase, state ownership reduces choice
competition policy
regulation to promote competition and prevent consumers from being exploited by firms with large market power
functions of the competition and markets authority
investigating mergers, assessing markets where there is a lack of competition, anticompetitive agreements, cartels, consumer protection
failures of the CMA
there may be information failure, there may not be anything wrong with a market, instead simply the way the consumers understood the workings
