Gov intervention Flashcards
(10 cards)
Gov intervention
• Gov intervene in market to correct MF
- Total welfare increase if cost < benefits gained in intervention
Types of gov intervention (8)
• Indirect taxes
• Subsidies
• Max price
• Min price
• Reg
• State provision of publicc gs
• Provision of info
Indirect taxes
• Tax lvl needs to be set so neg externalities eliminated & MSC of production= MSB
• FM output (QP) (MPC=MPB) Seek optimum output lvl where (Q1P1) (MSB=MSC)
- So tax at AB → Shift MPC curve UP to equal MSC at Q1
Indirect tax cons
• Hard to target
- tax too big/ small to correct MF →b cinfogap … gov don’t kno exact size Of Mf
• Motive to increase MF
- So obj conflict when desicions made abt tax
• Unpopular
- q0’s you forced to abandon plan to increase VAT be political opposition
Subsidies
• MSC> MPB So Optimum lvl output where MSB= MSC
- So used when there’s positive externalities
Subsidy cons
• Hard to target
- Too big/small
• Conflict w/ other obj
- Oppo cosI
• Hard to remove
-Subsidy = Increased income so if removed P can lobby gov
Max Price (Ceiling price)
• No Market price above certain lvl
• Positive externality in C gs - Merit gs
• More affordable g/s → increase D & decrease QS
• Set bellow equ for effect → S contracts & D extends
Max price cons
• Price forced down to make gs affordable
- S contracts → Exess D Q2 to Q1 → C wanting to buy Q1 better off
BUT- C wanting to by Q2 worse off bc no gs available
• Black Markets
- Gs bought at P1 are resold on black markets at higher price
- P sell directly onto black market to get higher price
Min Price
• for gs w/ neg externalities in consumption (demerit gs)
- So Gov raise price where MSC=MSB
• Set price above FM price → decrease QD Q1 to Q2 & increase QS Q to Q1
Min Price con
• Excess S
- Increase products on black market & Sold lower than min price
