2.11 GOVERNMENT INTERVENTION Flashcards
(11 cards)
what is government intervention
the actions taken by a government to influence or regulate the economy
reasons why governments intervene in markets
- reduce or eliminate negative externalities
- increase or maximise positive externalities
- increase the supply of merit goods
- reduce the supply of demerit goods
- supply public goods that would be undersupplied by the market
- reduce inequality and inequity in society
what is indirect tax
a tax imposed on producers by the government
what is specific tax
is where the tax per unit is a fixed amount - for example the tax per packet of 20 cigarettes
what is ad valorem tax
where the tax is a percentage of the cost of supply - eg. the standard 20% VAT
what is inequity
lack of fairness and justice
explain specific indirect tax on a market to deter market failure
- the imposition of an indirect tax will lead to an increase in the cost of supply for a firm
- this will lead to a shift in the supply curve up and left
- quantity supplied will decrease from q1 to q2 and price will increase from p1 to p2
advantages of indirect tax to correct market failure
- could reduce the quantity of demerit goods consumed
- they can be applied to very specific markets which have market failure
- they may encourage the supply of substitute markets that don’t have negative externalities eg. solar power instead of fossil fuels
disadvantages of indirect tax to correct market failure
- its a regressive tax which makes goods disproportionately more expensive for lower earners
- can be difficult to asses the size of tax needed and to implement efficiently
- if demand is inelastic a very large tax is needed which can lead to illegal shadow markets
whats a subsidy
a form of government intervention, usually involves the government giving suppliers a payment that reduced the cost of production in order to encourage them to increase supply
