government intervention Flashcards
(23 cards)
free market
in free market government stands back and lets supply and demand determine price and output
government intervention
when the state gets involved in markets and takes action to try and correct market failure and to improve economic efficiency
why do gov.n intervene
because they believe that there is not sufficient allocation of resources or productive efficiency
How does gov.n intervene
(STRIPS)
-Subsidies
-Taxation
-Regulation
-Information
-Pollution permits
-State provision
market based policies
the state takes action to affect the conditions of supply and demand to change price and output
- change S&D by influencing individual and seller
eg. offering subsides
non market based policies
the state intervenes directly by legally enforced regulations
eg. smoking bans, direct state provision
why are taxes levied
to raise revenue to finance
- state spending (on state provided goods)
- and subsidies to change market price eg. discourage the consumption of demerit goods
who does indirect tax effect
charged on producers of goods and services and is paid by the consumer indirectly
eg. VAT, excise duties (cigarette, alcohol tax) and import levies
who does direct tax effect
it is a charge on income or wealth
eg income tax
properties of progressive tax
rises with income
higher income owners pay a larger proportion in tax than low income groups
properties of regressive tax
falls with income
high income earners pay a smaller proportion of income in tax than lower income groups
properties of proportional tax
stays constant with income
specific indirect tax
fixed amount per unit
how does indirect tax effect price
firms have to collect an extra payment from consumers
effect is same as increase in cost of production
- causes a left shift in supply bringing up price level
how to solve market failure of merit goods
- subsidies
- state provision
- info campaigns
how to solve market failure of demerit goods
- indirect taxes
- regulation/bans
- age limits/ restrictions
- info provision
tax incidence
the burden of paying a tax can fall on consumers or producers
where is consumer incidence on a taxed demand and supply curve
the box below the top equilibrium (S2) until it meets the next equilibrium line of (S1)
where is producer incidence on a taxed demand and supply curve
the box above the first equilibrium (S1) until it meets the line of the second equilibrium
what is a subsidy
a payment made by the gov to producers or consumer to encourage production or consumption by lowering price and raising output
producer and consumer subsidies examples
P - money paid to firms eg trains or bus to reduce fares
C - bicycle subsidies for workers
what does the impact of a subsidy depend on
the amount and its PED
how do subsidies help consumers
supply shifts right, decreases price and increases QD
lower prices raise real incomes as consumers can now spend less to buy the same amount of an item
