EVALUATION Flashcards
What type of approach is regulation?
Command and control approach
Examples of commands
Bans, Limits, age caps
Examples of control
Enforcement and punishment
What happens if command and control is strong?
Economic agents are incentivised to change their behavior to consume/produce at the socially optimum level
What happens if command or control breaks down?
Regulation will not work
What happens when regulations are set too loosely?
firms may cheat regulations
resulting in government failure
How can a firm cheat regulations
Black markets, smuggling
What happens when regulations are too strict?
Firms are burdened, costs are increased and profits fall
Firms may begin to leave the country or shut down
firms may also reduce production and lay off workers increasing unemployment
GOVERNMENT FAILURE
How do subsidies correct market failure?
They encourage more production/consumption of merit goods
How do subsidies benefit consumers
Greater affordibility of necessity goods/services
How might costs be a risk of subsidies?
May derive from TAX ,which may forecast future tax rises, burdening the poor
What is an assumption made with subsidies?
We assume that subsidies come from fiscal dividends. They may be borrowed, which worsens the national debt and increases spending on debt interest payments.
What opportunity costs arrise from subsidies?
Money spent on subsidies can be spent on education or healthcare etc
The money spend on the increase in the debt interest payments can be spent on healthcare too.
How does indirect tax combat market failure?
Increases costs of production, MPC shifts left to = MSC, reducing overproduction, resulting in allocative efficiency at the social optimum.
if MPC shifts to=MSC what happens?
The externality is internalised
How does MPC shift to = MSC?
When firms begin to pay the cost to third parties
What is a further advantage of indirect TAX for the government in the long term?
Increases fiscal dividends- can be used to solve further market failures
What are the disadvantages of indirect tax to solve market failure
Assumes demand is elastic
If demand is inelastic an increase in price will have little affect on demand so overconsumption/production is not reduced
