Methods and Effects of Government Intervention in Markets Flashcards
What are Indirect Taxes?
They are taxes levied on purchased items
What are the two types of indirect taxes?
- Ad Valorem
- Specific
What is an Ad Valorem Tax?
These are taxes that are a proportion/percentage by the price charged.
What is a Specific Tax?
They are a fixed amount per unit purchased
Why are indirect taxes imposed?
- To discourage the production and consumption of demerit goods.
Imposed on both consumers and producers
How does the S/D Graph look like for the imposition of Specific Taxes?
What is the Incidence of a Tax?
It is the burden of a tax, imposed on either consumer; producer or government
What is the effect of indirec taxes on inelastic demand?
Consumers have the incidence of tax, or have a larger burden.
Supply Elastic
What is the effect of indirect taxes on elastic demand?
Producers have the incidence of tax.
Supply Elastic
What are Subsidies?
They are direct payments from the government to the producers of goods and services.
This is not inducive of a transfer payment
Why are Subsidies provided?
- To keep down prices for essential goods
- To encourage Merit Good consumption
- To contribute to a more equitable distribution of income
- To provide services underprovided in a free market
- To raise producers’ income, esp farmers
- To help exporters
- To reduce dependence on imports
Why are Subsidies provided?
- To keep down prices for essential goods
- To encourage Merit Good consumption
- To contribute to a more equitable distribution of income
- To provide services underprovided in a free market
- To raise producers’ income, esp farmers
- To help exporters
- To reduce dependence on imports
What is the maximum price?
It is a price ceiling. Must be set below price equillibrium.
Why are maximum prices implemented?
They are used to make essential goods and services more affordable.
What are some problems with setting a maximum price?
There will be excess demand, because producers aren’t willing to produce more.
