Section E Flashcards
Indirect Tax
A tax levied on expenditure on goods and services
Incidence of a tax
The way in which the burden of paying a sales tax is divided between buyers and sellers.
Polluter pays principle
Any measure whereby the polluter pays explicitly for pollution caused
Progressive tax
A tax that takes a higher percentage from rich
Regressive tax
Tax that takes higher percentage from the poor
Examples of indirect tax
Vat
duties on alcohol
Tax on fuel
Green tax
Aim if indirect tax
To use the price mechanism to reduce overproduction or demerit goods with negative externalities or to raise tax revenue
Indirect tax key steps:
1) Govt adds indirect tax to good
2) similar effect to increase in production costs
3) supply decreases
4) price raises
5) QD contracts
6) Quantity closer to QSO
7) OC reduced
8) less misallocation of resources
9) less MF
Indirect tax evaluation points:
1) difficulties in setting correct size of tax
2) PED (inelastic PED may mean consumption is not effective)
3) tax may be avoided (black market)
4) will not reduce negative externalities globally
5) other factors (rising income or rising price of substitute)
6) cost of putting it in place
7) info provision may work better
Subsidy:
A grant given by the govt to producer to encourage the production of a good or service
Aim:
To use price mechanism to encourage production and consumption or merit goods/ goods with positive externalities
Subsidy key steps:
1) Govt adds subsidy
2) similar effect to decrease in production costs
3) supply increases
4) price drops
5) QD extents
6) Quantity closer to QSO
7) UC reduced
8) less misallocation of resources
9) less MF
Prohibitation
An attempt to prevent the consumption of a demerit good by declaring its illegal
Prohibition Evaluation
- penalty needs to be correct
- practicalities of enforcing (opp cost)
- avoided by black markets
- Time lag
- poss govt failure
Regulation
A rule set down by the Govt that firms/ consumers need to operate within
E.g:
Limits,bans,prohibition,max/min price
Aim:
To reduce market failure for goods with positive/ negative externalities
Regulation key steps
1) what are the details of the reg? Should focus on changing behaviour
2) is the reg requiring action by consumers or producers
3) what is the penalty if they dont comply?
4) apply to practical problem
5) follow through with steps to reduce MF
6) is there a diagram showing shift in d/s that might help
Pollution Permit
A permit that allows the owner to emit a certain amount of pollution and that, if unused or only partially used, can be sold to another polluter
Aim:
To reduce MF by reducing negative externalities through market based system
Pollution permit key steps
- govt sets number of tradeable permits
- firms buy permits
- they can now only pollute a certain amount
- there is a penalty of a fine
- govt controls total pollution
- over time, level of pollution can be reduces by giving less permits
- negative externalities reduced
- op/oc reduced
- closer to QSO
- AE increases
- MF reduced
Pollution permits evaluation
- setting right level of permits
- setting right fine
- cost and impracticalities of enforcing (opp cost)
- time lag
- unfair advantage for larger firms
- need global strategy
Max and Min prices
Aim:
Encourage consumption by making more affordable and vice versa
Max Prices e.gs
-football, housing, food
Problems: opp cost if govt subsidise, back market, shortages
Min Prices eg.s
-alcohol, labour
Problems:surplus stock, opp cost for govt if they buy surplus stock, standard of living down, harmful goods have inelastic ped
Info Failure=
A lack of information resulting in consumers and producers making decisions that do maximise welfare
Info Provision
Govt delivery of consumers to consumers/ producers so that they are aware of full social bens/ cost of good.
Aim:
1) shift d curve closer to QSO
2) provide info about negative externalities so consumers/ producers can make informed economic decisions
Info Provision key steps
- Govt provides info
- consumers were previously unaware of full extent of harm to themselves and society so were over consuming
- can now make fully informed economic decisions and change behaviour
- D shifts left
- QD closer to QSO
- misallocation down
- AE up
- MF down
Info Provision Eval
- difficult to communicate info
- responsiveness of consumers
- time
Direct Provison
Govt intervenes in a market system and provides the good/ service to consumers funded by tax rev
E.g
-Defence, Education, Health
Direct provision key steps:
- govt decides good has significant importance to consumer
- However, if left to free market it has public good characteristics and due to lack of profit would be under produced
- govt pays by tax rev
- consumers can use the good for free or at a lower price
- consumption goes up
- closer to QSO
- AE up
- MF reduced
Direct provision evaluation
For:
- left to free market, would not be sufficient
- Fairness- human right
- govt expertise
- access to info
Against:
- OC because its free
- OP (difficult to find QSO)
- Opp cost of spending
- Private sector mire efficient with profit incentives (govt could possibly provide some and use private to help alleviate their back logs)
Govt Failure
Misallocation of resources arising from govt intervention, that causes a divergence between MSB and MSC
(Tries to intervene and makes it more inefficient)
Causes of Govt Failure
-decisions made in political interest
-short termism may not take into account long term considerations
-costs of intervention
-law of unintended consequences
- distortion of price signals leading to surplus and shortages.
E.g- patio heaters in northern ireland.
