Intervention Flashcards
What is a specific tax?
A set amount regardless of its price e.g £1.
What is an ad valorem tax?
A tax based on the value of the product e.g 10%
How does a specific tax affect the supply curve?
Creates a parallel shift
What are the benefits of a tax?
Redistributes income, raises revenue for spending by the gov on public goods, deters consumption of de-merit goods, internalises cost of negative externality.
Why may the government intervene despite making the market less efficient?
If it is able to change Q to reach its optimal point.
How does an Ad valorem tax affect the supply curve?
Pivots supply curve upwards, as the price increrases the amount of tax paid is greater.
Is tax placed on sellers or buyers?
It doesnt matter but typically opt for sellers as gov collect sales tax from sellers which is why it is more typical to tax the supply.
What is a price floor and why might the government introduce one?
A price floor is where it is illegal to set the price below. It protects producers incomes, creates a surplus/solves a shortage, reduce inequality e.g NMW, encourages investment in new technology.
What are the negative impacts of a price floor?
Loss of welfare, protects inefficient producers, inefficient allocation of resources e.g creates a surplus.
What factor determines how much of the tax incidence can be passed on to consumers?
Elasticity of demand and supply - if demand is inelastic and supply is elastic then a large amount of the tax can be passed on via higher prices.
What is the purpose of a subsidy?
Encourages the consumption and production of goods and services that have a private benefit and pos externality, merit goods and vitally or strategically important goods (useful if fall out with the rest of the world).
How to work out the cost of a subsidy?
The subsidy x new quantity.
Who benefits more from a subsidy when demand is inelastic and supply is elastic?
The consumer benefits most with the lower price as quantity wont be affect that much so the price drop is greater.
What are 5 types of subsidies?
Cash, tax concessions, assumption of risk (loan guarantees), stock purchases to keep the companys stock leavel greater than the rest of the market.
Why are price ceilings introduced?
To promote fairness and ensure basic goods are afforadable when there are no shortages.
