Role of Goverment in Micro Economics Flashcards
Why do goverments intervene (5)
Earn gvt revenue
support firms/ households
incluence level of production and consumtpion
promote equity
correct market failure
Gvt intervenes to earn gvt revenue and CASE study
taxing (GTS, VAT ) consumption to raise gvt revenue
Idirct taxes produce revenue and finance gvt spending to finance prokects
The UK generated 7.2% of its tax revenue for excuse on tobacco, fuel and alhol
Gvt interneves to supoort firms and CS
Can be for economic, policial and strategic reasons
Common Agricultural Policy (CAP) of the EU support sfarmers by providing direct payments to help with jobs, grows and developmenyt. Supports 22,000 young farmers, more tan 95,000 farms under agri environmental measures.
Gvt internves to supprt huseholds low incomes case study
Indonesia has fuel subsidies in place sinc county gained intependance in 1949. These supports people on low incomes in order to acces fuel to travel . Although they do not benefit from sustainability , it enables job mobility and opportunities
Gvt intervenes - Influencing level of production
Demerit goods –> gvs want to decrease production
Merit goods –> gvt wants to increase productionn
Chinise gocermet has invested in clean energy and operating at an emissions traidng scheme to promote sustaibavity
Gvt intervenes - Influencing level of production
Demerit goods –> gvs want to decrease production
Merit goods –> gvt wants to increase productionn
Chinise gocermet has invested in clean energy and operating at an emissions traidng scheme to promote sustaibavity
Gvt interves - influencibf consumption
Discouraging demerit goods
WHO states that tobacco consumption can kill approx 8 million people each year so many countries have a ranege of inidext taxes, legislation and support programess to discourage consumption
Price ceilings - maximum price and RLS
Price ceiling set by the government that are set below the equilibrium price.
- Berlin currently employs price controls for rented acoommodation
Aims of price ceilings and most common use
Below EQ price
-increase consumption
- reduce price for low income consumers
- prevent exploitation by monopolies
- low cost food
- affordable housing
Price Ceilings graph
Annotations:
Before PE QE
gvt sets maximum price below PE
B; consumers demand greater amount Q2
C: producers willing to supply less Q1
= Shortage, excess demand
If gvt does not invervene futher, policy objectives are not achieved. The maximum amount consumed has fallen than QE and although the price is lower, only for those few.
Possible consequencs of imposing maximum price (5)
Shortage
rationing problem
black markets
allocative inefficiency
consequences for stakeholders
Consequence of Price celing - SHORTAGE
At Pmax QS is Q1 lower than QD Q2 so not all consumers willing and able will have the opp to cosume the good –> Shortage
Consequence of Price celing - Rationing problem
There is a problem on who gets to consume the good
When shortages result from price ceilings, the good or service will need to be allocated in a different way than by using the price, such as by queueing, or on a first-come-first-served basis.
Consequence of Price celing - black markets
Incentive
Where consumers are willing and able to purchase at higher price
Producers are able to sell more goods at higher pric
Consequence of Price celing - welfare loss
Eliminates allocative efficiency
- smaller amount than socially optimal - underallocation
- community surplus before a + b + c + d + e
- after a + c + e
consumers - some better off, some worse off
producers - worse off
Solutions for max price/ price celings (3 ways and diagram)
- Subsidize
- Gvt Produce the shortfall quantity
- Store and release when needed
Supply shifts from S1 to S2
- quantity consumed increases at lower price = success
price floor, minimum price
Price floors are minimum prices set by the government that are set above the equilibrium price.
Aims of price flooors
Above EP
- increase income of produers
- protect workers
Price floor graph and annotations
Producers w&a supply Q2
Consumers wa consume Q1
= SURPLUS
gvt need to intervene futher
Consequences of imposing minimum price (prcefloor)
It produces surpluses.
It promotes the creation of black markets.
The government needs to dispose of the surplus.
It might create firm inefficiency.
It eliminates allocative efficiency and generates welfare loss.
There are consequences for market stakeholders.
Consequence of minimum price - surplus
at Pmin squantity supplied Q2 is much higher than quantty demanded Q1 - not all will be purschased
= SURPLUS
Consequence of minimum price - black market
Producers will sell at balck makrets at less than the minimum price
Consequence of minimum price - gvt dispose of surplus
gvt can buy excess surplus –> shiting D outwards
can nstore the good - additional costs
sell surplus abroad (expport)
send surplus developing countrues - reduces local demadn in LEDC
burn food - unethica;
Consequence of minimum price - firm ineficiency
If firms know they will receive a higher price no matter how inefficient they are in their production process, they will not be motivated to reduce costs and use more efficient methods of production.
Allocatve inefficiency and welfare loss due to price floors
Consumers - worse off higher price lower q
producers -nif gvt purchases surplus better off as higher pirce and higehr q
workers- if market size increases more workers hired
gvt - if buys surpluss opportunity costs
Indirect Taxes and aims
Takes on expendirture and are paied indirectly when consumers purchase a good
- collect gvt revenue
discourage consumption of demerit goods
redistruidute income
correct negrtive externalities
Difference between specific and ad valorem tax
specific tax shifts the supply curve upwards parallel to the original supply curve, while for a percentage tax, the gap between the two supply curves increases as the price rises.
Annotate Indirect tax graph
Effect in stakeholdres of iNDIEXT TAX
Consumers worse off they pay higher tax and consume less
Producers wors off as they sell up a smaller amouny of good and recive a lower price –> employmnet worse off also
GVt better off collects tax revenue (pc -pp) x Q1
Welfare loss of indirect taxs
Consumer surplus reduces from triangle shaded in figure 1 to triangle between Pc and Q1 in figure 2
Producer surplis reduves from triangle shaded in figure 1 between PE and Q1. to between PP and Q1
Rectangle (pc - pp) x Qt is the goverment revenue which comes back to society as spending
Welfare loss is a + b social welafre loss, it reduced the quantity of what is socially optimal, assuming there are no externalites. –> inefficiency
Subsidy and aims
Per-unit payments that are used to lower production costs and increase the output of the market.
- increase producer revenue
- nececsities afforable
-encourage consumption of good or service - support growth
- encourage exports
- correct positive externalities
Annottaion of subsidy graph and effect on stakeholders
Quantity produced and cosnumed increases from QE - Q1 –> market increases
PE decreases to PC (price payed by consuemrs) but the revenue is Pc + subsidy which is PP
Consumers are better off pay lower P and consume more
Producers better off sell more and recieve higher prixe
Gvt worse off opportunity cost of subsidy
EMployment is better off
Direct provision of services
Services that may be provided directly by state could include
-public transport
- rain networlds
- telecommunivacatoiosns
-educton
-energy
Regulation and legislation
Regulation is when governments monitor firms and industries to confirm that they are abiding by relevant legislation.
Laws enacted by governments to limit, prohibit, or require certain behaviours.
examples. age restrictions, advertising bans, smoking bans
