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Y1 MICRO Market Failure And Government Intervention > Alternative Methods Of Government Intervention > Flashcards

Alternative Methods Of Government Intervention Flashcards

1
Q

Why governments intervene in a market mechanism

A

To correct market failure

Improve economic welfare

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2
Q

Methods of government intervention

A 
Indirect taxation
Subsidies
State provision 
Price controls
Buffer stock system
Regulation and legislation
Information provision
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3
Q

Indirect taxation

A

Taxes of goods or services

Used for demerit goods or goods with negative externalities

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4
Q

Why impose a tax

A

Finance government spending

Change the market price of a good

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5
Q

Tax revenue

A

Income tax £182bn
VAT £138bn
National insurance £126bn

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6
Q

Government spending

A

Social protection £240bn
Health £145bn
Education £102bn

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7
Q

Types of indirect tax

A 
Specific (fixed amount on purchases of commodities)
Ad valorem (charged as proportion of price)
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8
Q

How tax works

A

Discourage production/consumption of demerit goods that produce negative externalities (reduce QD and QS by increased P)

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9
Q

Indirect tax diagram

A

S + tax shift to the left of S
Increase price
Decrease quantity
Axis: cost/quantity

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10
Q

Burden of tax if demand is inelastic

A

Burden on consumer

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11
Q

Burden of tax is demand is elastic

A

Burden on producer

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12
Q

Advantages of taxation

A

Internalise the negative externalities
Force payment on the polluter
Used to fund merit and public goods

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13
Q

Disadvantages of taxation

A

Difficult to determine amount to tax
PED of many demerit goods is inelastic so burden on consumer (may not have intended effect)
Equitable?
If it’s too progressive it will discourage work or production creating unemployment
Cost of enforcement
Non compliance

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14
Q

Conclusive points on taxation

A

Equitable?
Progressive of regressive?
PED?

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15
Q

Subsidy

A

Payment usually from government to producers/consumers of goods and services
Reduce cost/price to encourage a higher level of production/consumption

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16
Q

Subsidy diagram

A

S + subsidy to the right of S
Decrease in P
Increase in Q
Axis: P/Q

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17
Q

Benefit of subsidy if demand is inelastic

A

More benefit to consumer (not as effective)

Large change in P = small change in Q

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18
Q

Benefit of subsidy if demand is elastic

A

More benefit to producer (more effective)

Small change in P = large change in Q

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19
Q

Advantages of a subsidy

A 
Lower cost for producer 
Lower price for consumer 
Can bring positive spillover effects 
Create more tax revenue
(Child care subsidies) higher employment
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20
Q

Disadvantages of a subsidy

A

Other incentives needed
Firms become dependent on financial assistance
Expensive extra burden on tax payers
Unintended undesired consequences

21
Q

State provision/government expenditure

A

Expenditure taxes used to fund government expenditure

Government supplying goods and services such as healthcare, education and housing

22
Q

State provision diagram

A

S + state provision way to the right of S
Decrease in P
Increase in Q
Axis: P/Q

23
Q

Alternative state provision diagram

A

MSB to the right of MPB
MC
Axis: benefit/Q

24
Q

Advantages of state provision

A

Corrects market failure

25
Q

Disadvantages of state provision

A

Difficult to calculate SB so how should it be provided
Not enough people using the good, government failure may occur
Opportunity cost

26
Q

Price controls

A

Minimum and maximum prices

When P doesn’t equal to MC

27
Q

Minimum price diagram

A

S and D
Axis: P/Q
Min price line above equilibrium price
Excess supply

28
Q

Aim of minimum price

A

Protect workers on low pay (min wage)

Make markets equitable

29
Q

Maximum price diagram

A

S and S
Axis: P/Q
Max price below equilibrium price
Excess demand

30
Q

Aim of maximum price

A

Enable those on low incomes to afford housing (max rent)

Make markets more equitable

31
Q

Advantage of maximum prices

A

Increase fairness

Prevent monopolies exploiting

32
Q

Disadvantages of maximum price

A

Demand higher than supply (people not able to buy)
Gov may need to introduce a rationing scheme to allocate the goods
Black market creation

33
Q

Advantages of minimum price

A

Producers have guaranteed minimum income (encourage investment)
Stockpiles can be used for excess supply

34
Q

Disadvantages of minimum price

A

Consumers pay higher prices than market equilibrium
Excess supply (inefficient allocation of resources)
High opportunity cost
Destroying excess is a waste of resources

35
Q

Buffer stock systems

A

For commodity markets where prices are volatile and fluctuate
Scheme to stabilise price of a commodity by buying excess supply in periods where S is high and selling when S is low

36
Q

Why prices fluctuate

A

Changes in supply
Changes in demand
D and S are inelastic in agricultural markets

37
Q

Why price fluctuations are bad

A

High level of uncertainty for producers

Unlikely to invest in improving productivity

38
Q

Buffer stock system diagram

A 
S glut way to right of S poor
Axis: P/Q
Target price in middle of S poor eq and S glut eq
S poor = excess demand
S glut = excess supply
39
Q

Advantages of a buffer stock system

A

Farmers guaranteed income even in poor harvests

40
Q

Disadvantages of a buffer stock system

A

If price too high or low in respect to natural equilibrium the scheme would run into difficulties

41
Q

Regulation and legislation

A

Government intervene through legislation by influencing price or quantity
Discourage use of demerit good producing negative externalities
Limit monopoly power
Prevent exploitation of labour

42
Q

Examples of regulation and legislation

A

Minimum age to buy alcohol
Prevent emissions beyond a certain level
Equal pay act

43
Q

Regulation and legislation diagram (demerit good)

A 
MC
MPB to right of MSB
Axis: benefit/Q
Decrease P
Decrease Q
44
Q

Advantages of regulation and legislation

A

Easy to understand
Legal ban sends clear signal it is wrong
Fairer than taxes

45
Q

Disadvantages of regulation and legislation

A

Little incentive for a firm to develop more efficiency mechanisms
Socially inefficient to ban everything
May encourage people to break the law
Taxes may be better for gov to collect money to spend on alternatives
Create underground economy (drugs)

46
Q

Information provision

A

Ensure consumers and producers are well informed to reduce market failure

47
Q

Examples of information provision

A

Providing education on environment and health
Promote widespread access to internet
Legislation to prevent use of mis-selling/false information

48
Q

Problems with government intervention

A

Gov must have full knowledge of MC and MB
Difficult to measure costs/benefits
Size of tax/subsidy/legislation must reflect size of externality
Administrative costs
Opportunity cost

Y1 MICRO Market Failure And Government Intervention (7 decks)

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