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IB Economics > Unit 4 Government Intervention > Flashcards

Unit 4 Government Intervention Flashcards

1
Q

reasons for govt intervention

A

to raise revenue, support firms, support low income households/promote equity, influence the level of production & consumption of certain goods and services/correct market failures

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2
Q

how the govt intervention raises their revenue

A

taxation

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3
Q

tax revenues

A

a government’s primary source of revenue

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4
Q

direct taxes

A

taxes on incomes earned by households and firms

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5
Q

indirect taxes

A

taxes on consumption which are paid by consumers through producers, and are given to the government

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6
Q

“Progressive in nature”

A

the percentage paid is proportional to the income received

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7
Q

“Regressive in nature”

A

low income individuals pay more as a percentage of their income

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8
Q

methods for govt intervention to supports firms

A

subsidies to certain firms/industries, tax concessions to certain firms/industries, protectionist measures from imports for certain firms/industries, loans to certain firms/industries, financial bailouts to certain firms/industries

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9
Q

rationale for govt intervention to supports firms

A

to help small industries grow, to protect jobs from overseas competition, to protect infant industries, to ensure critical/strategic industries are operational

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10
Q

methods for govt intervention to support low income households/to promote equity

A

taxes, transfer payments, providing basic infrastructure - water pipes/electricity etc.

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11
Q

rationale for govt intervention to support low income households/to promote equity

A

the free market economy is designed so that those who work hard, have skills, have opportunities, have risk-taking outlook, or have ownership of factors of production will be rewarded, is not concerned with equity, and will make people low income - lacking the money for the basics of living (sanitation, education, health, malnutrition etc.)

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12
Q

negative externalities

A

goods that create negative spillover costs, both when consumed and/or produced e.g. pollution

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13
Q

methods for govt intervention to influence the level of production & consumption of certain goods & services/to correct market failures

A

combination of regulation/legislation, the government tries to influence (decrease) the levels of consumption/production

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14
Q

rationale for govt intervention to influence the level of production & consumption of certain goods & services/to correct market failures

A

the free market overproduces products

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15
Q

market failures the govt corrects

A

positive and negative externalities created by consumption and production, monopoly/power abuse, public goods, demerit and merit goods

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16
Q

two types of taxes

A

direct, indirect

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17
Q

types of direct taxes

A

income, corporate, capital gains

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18
Q

income taxes

A

money taken out of wages

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19
Q

corporate taxes

A

money taken out of any profit made

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20
Q

capital gains taxes

A

money taken out of profit from investments, bank interest, shares, property

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21
Q

types of indirect taxes

A

specific (unit/excise), ad valorem

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22
Q

specific taxes

A

a fixed amount of tax per unit on a particular good or service sold

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23
Q

ad valorem taxes

A

a fixed percentage of the price of the good or service, general sales taxes or value added taxes - the amount of tax increases as the price increases

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24
Q

why the govt imposes indirect taxes

A

source of revenue, method to discourage consumption of harmful goods, can be used to redistribute income, method to improve the allocation of resources by correcting negative externalities

25
Q

how excise taxes can be used to redistribute income

A

luxury goods are taxed to narrow the difference between higher and lower income earners

26
Q

stakeholders

A

individuals or groups have an interest in something and are affected by it

27
Q

consequences of indirect taxes for consumers

A

receive less of the good and are paying more for it

28
Q

consequences of indirect taxes for producers

A

experience a fall in their revenues

29
Q

consequences of indirect taxes for workers

A

fewer workers are needed to produce products → unemployment

30
Q

consequences of indirect taxes for the govt

A

the only stakeholder that gains, as it gains tax revenue for its budget

31
Q

other consequences of indirect taxes

A

taxes raise prices → shift supply curve to the left and reduces output → market size shrinks, unemployment

32
Q

subsidy

A

assistance by the government to firms, consumers, industries or sectors of an economy; acts as an incentive to produce more and lowers the marginal cost of production

33
Q

subsidy forms

A

direct cash payments or other forms of assistance e.g. low-interest for college tuition or buying a home, tax relief

34
Q

rationale for subsidies

A
  1. to increase the consumption of goods by lowering the price
  2. support a particular industry by helping with production costs
  3. encourage exports and address a balance of payments deficit by increasing export revenue
  4. encourage other firms to join the market and hence increase competition/prevent monopolies arising
35
Q

merit goods

A

goods deemed beneficial for society

36
Q

graphical impact of subsidies

A

shifts the supply curve to the right by the amount of the subsidy because producers are willing to supply more than previously, as the govt is subsidizing the cost - reduces the market price, increases quantity traded

37
Q

impact of subsidies on consumers

A

consumers benefit, as the market price is lowered, thus more people are able and willing to buy the good

38
Q

impact of subsidies on producers

A

producers benefit, as their production costs are reduced which helps to improve their competitiveness and profitability

39
Q

impact of subsidies on the govt

A

govts spend money on financing the subsidy, but there is an opportunity cost in doing so the net benefits to society may outweigh the costs

40
Q

advantages of subsidies

A
  1. controls price inflation
  2. boosts employment (especially in poor areas)
  3. improves human capital/productivity
  4. protects infant industries
  5. promotes growing demand for renewability
  6. improves affordability for low-income individuals
41
Q

disadvantages of subsidies

A
  1. distortion of market prices
  2. risk of fraud for subsidy payments
  3. expensive, high cost for taxpayers
  4. inequitable, many rich people benefit
  5. environmental damage (subsidies on energy industries reduce the incentive to make efficient use of energy)
  6. protects inefficient businesses
42
Q

impacts of subsidies on market outcomes

A
  1. equilibrium of quantity produced and consumed increases (Q* → Qsub)
  2. equilibrium price decreases (P* → Pc)
  3. price received by producers increases (P* → Pp)
  4. government spending increases (0 → (Pp - Pc) x Qsub)
  5. over allocation of resources, as Qsub is more than Q*
  6. firm’s supply curve shifts to the right
43
Q

consequences of subsidies for consumers

A

better off - decrease in price of goods (P* → Pc), increase in quantity purchased (Q* → Qsb)

44
Q

consequences of subsidies for producers

A

better off - prices increases (P* → Pp), quantity produced increases (Q* → Qsb), higher revenue from (P* x Q*) → (Pp x Qsb)

45
Q

consequences of subsidies for the govt

A

worse off - to obtain revenue for the subsidy, the government has to reduce expenditures elsewhere in the economy and may have to raise taxes or run a budget deficit

46
Q

consequences of subsidies for workers

A

better off - output expands from Q* → Qsb, firms are more likely to hire more workers to produce the extra output

47
Q

positive consequences of subsidies for society

A

society consumes more merit goods, society gets more equitable, as poor people can afford basics of life

48
Q

negative consequences of subsidies for society

A

over allocation of resources (Q* → Qsb), the higher price received by producers (P* → Pp) allows relatively inefficient ones to continue producing, subsidy has to be paid for with taxes

49
Q

negative consequences of subsidies for foreign producers

A

worse off - subsidies are positive for domestic producers, but negative for the producers of other countries who are unable to compete with the lower price of the subsidized goods

50
Q

price controls

A

a form of government intervention where maximum prices (price ceilings) and minimum prices (price floors) are imposed so that prices are unable to adjust to their equilibrium level determined by demand and supply

51
Q

result of price controls

A

market disequilibrium, and therefore shortages (excess demand) or surpluses (excess supply)

52
Q

how price controls differ from taxes and subsidies

A

once they are imposed, they do not allow a new equilibrium to be established and thus forces a persistent market disequilibrium

53
Q

price ceiling

A

the maximum legal price the government sets for a particular good, below the equilibrium price

54
Q

result of price ceilings

A

a lower quantity supplied and sold than at the equilibrium price, results in a shortage (excess demand)

55
Q

examples of price ceilings

A

basic commodities in the Philippines, domestic air travel during World Cups

56
Q

impacts of a price ceiling on supply

A
  1. suppliers would be less willing to supply at the PMax$, leading to a shortage
  2. shortages can lead to parallel markets e.g. black markets or more expenses elsewhere e.g. rationing systems, policing/enforcing and other inspectors
57
Q

consequences of a price ceiling on the economy

A

shortages, non-price rationing, underground (parallel) markets, rnderallocation of resources to the good and allocative inefficiency

58
Q

non-price rationing

A

refers to a method of dividing up something among possible users

59
Q

positive impacts of a price ceiling on consumers

A

gain from producers, those who are able to buy the good at a lower price are better off

IB Economics (4 decks)

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