1.4 Flashcards
(16 cards)
What is indirect taxation?
When a good has a negative externality, indirect tax is introduced to prevent market failure
This will cause a fall in supply and increase costs
What are advantages and disadvantages of indirect taxation?
+ Internalises the externality
+ Raises government tax revenue
- Could be conflict between government goal of raising revenue and solving the externality, which makes setting the tax difficult
- Taxes are politically unpopular
- Regressive, worse for the poor
What are subsidies?
In order to solve positive externalities and fix information gaps subsidies are used
This will shift supply curve to the right and lower cost of production
What are advantages and disadvantages of subsidies?
+ Society reaches social optimum position and welfare is maximised
- High opportunity cost
- Can cause producers to become inefficient
What are maximum and minimum prices?
Maximum price is a legally imposed price for a good that the suppliers cannot charge above. Set on goods with positive externalities.
Minimum price is a legally imposed price at which the price of a good cannot go below. Set on goods with negative externalities.
Advantages and disadvantages of maximum and minimum prices?
+ Helps to increase social welfare
+ Helps reduce poverty and increase equality
- Causes excess supply / demand
- Difficulty of knowing the size of the externality so the government don’t know where to set prices
Other methods of government intervention
Tradable pollution permits - allows owner to pollute up to a specific amount of pollution and limits the maximum amount of pollution
State provision of public goods - government provide public goods through taxation
Provision of information - government provides information to allow people to make informed decisions
Regulation - ensures firms do not exploit their customers or take advantage of market position
Advantages and disadvantages of tradable pollution permits
+ Pollution will fall
+ Government can raise revenue by selling permits
+ Encourages companies to use greener technology
- Raises costs for businesses
- Expensive to monitor and police
Advantages and disadvantages of state provision of public goods
+ Corrects market failure by producing important goods that wouldn’t be provided for
- Expensive
- Government may be inefficient at production since they had no incentive to cut costs
Advantages and disadvantages of provision of information
+ Helps consumers to act rationally
- Expensive
- Consumers may not listen to information provided due to irrational behaviour
Advantages and disadvantages of regulation
+ Ensures consideration in externalities, prevents exploitation of consumers and keeps consumers fully informed which will help overcome market failure
- Laws may be expensive for government to monitor
- Firms may pass on costs to the consumer in form of higher prices
When does government failure occur?
Occurs when government intervention in the market goes wrong which leads to net welfare loss
What is distortion of price signals?
For example, a minimum price sends a signal to producers to supply more. In agricultural markets this has resulted in excess of perishable products which end up going to waste
What are unintended consequences?
Some interventions cause effects which the government didn’t intend to happen
Consumers and producers may react to new policies in unexpected ways so the policy doesn’t have the effect it should
What are excess administration costs?
A list of money that is allocated by the government is actually used up on basic administration costs. The social costs will be greater than the social benefit, once administration costs are taken into account
What are information gaps?
Government decision making is subject to some information gaps and cognitive biases that consumers face
