3 Government Microeconomic Intervention Flashcards
(30 cards)
Reasons for price controls
- Ensure affordability
- Stabilise markets
- Prevent excessive pricing
Maximum price (price ceiling)
Government price control that is set below the equilibrium price, meaning that sellers cannot charge more than a certain price for goods/services
Reasons for imposing maximum price
- Allows basic goods to be affordable, low-income households can afford
- Prevent excessive pricing, reduce consumer exploitation
Advantages of maximum price
- Goods are affordable, allows low-income households to consume them
- Prevents consumer exploitation through excessive pricing of goods/services. Consumer welfare
- Encourages consumption by keeping prices low. Higher demand as demand & price have an inverse relationship
Disadvantages of maximum price
- May lead to shortages. Prices are below eq. so demand likely to be high. Supply may not be produced quickly enough for D = S
- Shortages can lead to the creation of black markets. Shortages, people may be desperate, even when sold above max price they will consume
- Goods may have low quality, as producers are not receiving as much as before, so to maximise profit they may cut costs
Minimum price
Government price control that is set above the equilibrium price, meaning that sellers can not charge less than the specific price
Advantages of minimum price
- Ensures fair pay to workers, especially in sectors where prices are volatile (e.g agriculture)
- Reduces risk of exploitation of labour by having minimum wage set
- Discourages consumption of demerit goods as minimum price causes goods to be more expensive
Disadvantages of minimum price
- Black markets where demerit goods are sold for cheaper prices
- Minimum price causes price of goods/services to be more expensive. This may lead to less consumption = surplus
- Waste of resources due to surplus
Indirect tax
Tax on goods and services rather than income
Excise tax
A type of indirect tax that is applied to certain goods, usually those that are considered harmful/ non-essential
E.g Cigarettes, alcohol
Incidence of tax
Inelastic - Consumers bear more
Elastic - Producers bear more
Advantages of buffer stock schemes
Stabilise prices, prevents extreme price fluctuations benefitting both producers & consumers
Impact of tax on price/quantity
Price increases
Reduced quantity demanded, especially for elastic goods as prices are more expensive
Subsidy
Financial aid provided by government to lower production costs & make goods/services more affordable
Impact of subsidies on prices/ quantity
Lower prices due to production cost being cheaper
Increased quantity supplied, cheaper for firms to produce mroe good
Increase quantity demanded as goods are cheaper
Incidence of subsidy
Inelastic- consumers gain more
Elastic- producers benefit more from higher revenue due to demand increase
Buffer stock schemes
Governemnt intervention to stabilise prices of commodities by buying up excess supply during periods of surplus and releasing the stock during periods of shortages
How does buffer stock schemes work
Buying excess supply leads to decrease in supply in market, leading to increase prices
Releasing during shortages, leads to increase market supply, leading to decrease prices
Disadvantages of buffer stock schemes
High costs of purchasing, storing, maintaining stock
Risk of excess supply if demand falls before releasing stock - waste, inefficient resource allocation
Purpose of information provision
- Reduce consumption of demerit godos
- Increase consumption of merit goods
- Reduce risk of market failure
- Promote social welfare
Information provision
Providing accurate + full information & detail about a good/service to help consumers make better economic decisions
Examples of how information provision can happen
Food labels (sugary drinks, junk food)
Regulations/ bans
Advertisements
Financial literacy programs
Disadvantages of information provision
Can be costly
May have limited effectiveness if people ignore/ distrust information
Also for demerit goods because there is a addictiveness factor, more difficult to reduce consumption directly
Gini coefficient
Numerical measure of income & wealth inequality within population/ economy
