Year 1 micro - Market failure Flashcards
why are indirect taxes used
- a form of govt intervention used to raise government revenue (like VAT)and to solve market failure( reduce consumption of demerit goods)
what are indirect tax
- a tax on expenditure that increases cost of production for firms but can be transferred to consumers via higher prices
what are direct taxes
taxes on income that can’t be transferred, eg National insurance, income tax, corporation tax
what are specific indirect taxes
taxes per unit , eg wine duty having a tax of £2.23 per bottle, these shift the supply curve parallel to the left
what is an ad valorem tax
a tax as a percentage of the price being charged, eg VAT at 20%, the supply curve will shift pivoted
impacts of indirect taxes on the market
- supply curve shifts left/upward (increased cop) to s1 plus tax
- price increases and quantity decreases
impact of indirect taxes on the economic agents
consumers - raise price, lower consumer surplus, lowers quantity, lowers choice, regressive, as they take a larger proportion of low income households
producers - lower producer revenue, lower producer surplus, workers could lose their jobs, with quantity falling, there is less need for workers to produce
governemnt - raising revenue, solving key market failure, however, unintended consequences (harms to consumers and businesses) . eg brain drain, black market
what are subsidies
a money grant given to firms by the government to reduce costs of production and encourage an increase in output
what are subsidies used for
- to solve market failure by increasing consumption and production
- increase affordability
describe the impact of a subsidy on a graph
- supply curve shifts right , S1 to S1 + sub
- ## price decreases, quantity increases
impact of subsidies on stakeholders
consumers - lower prices is good, but how will the subsidies be funded, tax increase
producers / workers - increase in producer revenue and surplus. since labour is a derived demand , higher demand for workers, higher employment
govt - will benefit from subsidies if two main aims are achieved, but subsidies may be expensive, opportunity cost may occur. also, are producers taking advantage of these subsidies, they could be using the extra revenue to pay off debt/pay shareholders
what is a minimum price
a fixed price set by the government above the equilibrium market price
why is minimum price used
- to protect producers from price volatility (eg farmers)
- to solve market failure (reduces negative externalities)
impact of minimum price on economy
- prices increase from p1 to pmin
- there is contraction in demand, moves up the demand curve
- extension of supply - moves up
- excess supply is created
- burden on producers, as producers are spending a lot to make these, but are selling less, impacts profit, also, what would they do with the excess??
what is intervention buying
When the government buys excess supply
impact of minimum price on stakeholders
consumers - lower consumer surplus as they are paying higher prices, quantity and choice are lower, affordability is lower for low income households, IT IS REGRESSIVE. taxes may also be higher to fund intervention buying
producers - if there is intervention buying, producers revenue increases, increased producer surplus. if not, cop increases, output decreases, firms may leave the market
government - good if they reach their objectives
- however effects on consumers such as the regressive nature, also unintended consequences like black markets forming
- concern abt intervention buying cost, oppurtunity cost?? also what r they gonna do after they buy the excess supply
