Government Intervention Flashcards
(47 cards)
1
Q
Indirect taxes
A
- can be imposed on purchase of goods and services
- two types: specific taxes - a fixed amount charged per unit of a particular good, no matter price of a good
Ad valorem tax - charged as a proportion of a good. Causes non parallel shift in supply curve
2
Q
Government taxes to deal with negative externalities
A
May use multiple indirect taxes on one item -> aims to internalise the externality that the good produces -> make revenue for government which can be used to offset effects of externalities
3
Q
Total amount of tax paid
A
- amount of tax passed on to consumer depends on PED - the more inelastic, the more passed on to consumer
4
Q
Advantages of taxation
A
- cost of negative externality internalised -> may reduce demand and level of goods production -> reducing effect
- revenue gained can be used by government to offset externalities
5
Q
Disadvantages of taxation
A
- Difficult to put monetary value on cost of negative externality
- for inelastic demand goods, demand isn’t reduced by extra cost of tax
- increase cost of production -> reduces product’s international competitiveness
- firms may choose to relocate and sell goods abroad to avoid tax -> remove contributions o economy
- revenue received by gov’t may not be used on reducing effects of externalities
6
Q
Subsidies
A
- govt pay subsidies with aim of encouraging production and consumption of goods and services with positive externalities. Supply curve shifts to right.
- can encourage purchase and use of goods/services which reduce negative externalities
- proportion of subsidy producers and consumers benefit from depends on elasticity of supply and demand curves
7
Q
Advantages of subsidies
A
- benefits of goods with positive externalities is internalised
- can change preferences. Making merit good cheaper increases demand for it
- positive externalities still present
- can support domestic industry until it grows to point that it can exploit EOS and become internationally competitive
8
Q
Disadvantages of subsidies
A
- difficult to put monetary value on benefit of positive externalities
- any subsidy has opportunity cost
- make producers inefficient and reliant on subsidies - less incentive to reduce costs or innovate
- effectiveness depends on PED
- subsidised goods and services may not be as good as those they’re aiming to replace
9
Q
Maximum prices
A
- set to increase consumption of merit good or to make a necessity more affordable
- if set above market equilibrium, will have no impact
- if set below -> excess demand and shortage in supply -> product needs to be rationed out
- a good PES and PED will have big effect on amount of excess demand
10
Q
Advantages of max prices
A
- can help increase fairness -> allows more people ability to purchase certain goods and services
- can prevent monopolies from exploiting consumers
11
Q
Disadvantages of max prices
A
- since D>S, some people can’t buy product
- govt may need to introduce rationing scheme to allocate good eg ballot
- excess demand can lead to creation of black market for good
12
Q
Min prices
A
- make sure suppliers get fair prices
- if set below market equilibrium, will have no impact
- if set above, will reduce demand and increase supply
- govt must purchase excess supply at guaranteed min price. The goods bought will be either stockpiled or destroyed.
- goods PES and PED will have big impact on amount of excess supply
- restrict monopsony power as buyer can’t keep negotiating lower prices
13
Q
Advantages of min price
A
- producers have guaranteed min income -> encourages investment
- stockpiles can be used when supply reduced or as overseas aid
14
Q
Disadvantages of min price
A
- consumers paying higher price than market equilibrium
- resources used to produce excess supply could be used elsewhere -> inefficient allocation of resources
- schemes may have high opportunity cost
- destroying excess goods is waste of resources
15
Q
State provision
A
- govts use tax revenue to pay for certain goods and services so that they’re free/largely free, when consumed
- e.g. NHS, state education, waste disposal and the fire and police services
- can come directly from govt or alternatively govt can purchase good/service from private sector and provide it to public for free
16
Q
Advantages of state provision
A
- can be used to increase consumption of merit goods, such as education and health
- can help reduce inequalities in access to services
- can redistribute income
- level of state provision is value judgement made by govt -> based on how important to society they think it is that they provide good/service
17
Q
Disadvantages of state provision
A
- less incentive to operate efficiently (no price mechanism)
- may fail to respond to consumer -> lacks motive of profit to determine whats supplied
- large opportunity costs
- can recue individuals’ self reliance
18
Q
Health care being state provided
A
- govt funds NHS so society benefits from positive externalities of health care
- drawbacks include: NHS is free at point of delivery -> excess demand and long waiting lists
- hospitals and clinics can be wasteful of resources
- may not always respond to needs and wants of patients
- can reduce patients’ self-reliance
19
Q
Privatisation
A
- the transfer of the ownership of a firm/industry from the public sector to private sector
- can lead to more efficient firm/industry -> will be open to free market competition
20
Q
Privatisation includes:
A
- sale of public firms
- contracting out services - govt pays private firm to carry out work on their behalf
- competitive tendering - private firms bid/compete to gain contract to provide service for govt. Will compete on price and quality of service offered
- Public Private Partnerships (PPPs) - private firm works with govt to build something or provide service for public. An example is a PFI (Public Finance Initiative) - a private firm is contracted by govt to run a project
21
Q
Advantages of privatisation
A
- increased competition improves efficiency and reduces x-inefficiency
- improves resource allocation - market signals
- PFIs enable building of important facilities govt couldn’t afford
- PFIs eans lower taxes in SR -> govt wont pay for new facility
- govt gains revenue from selling firms
22
Q
Disadvantages of privatisation
A
- privatised public monopoly likely to become private monopoly -> extra measures needed
- privatised firms less focused on afety and quality
- PFI often cost more in LR than worth - adds govt debt
- PFI means higher taxes for future generations to pay for cost of govt leasing facility
23
Q
Regulations
A
- rules enforced by authority and backed up with legislation -> legal action can be taken against those who break rules
- used to try and reduce market failure and its impacts
can help in: - reducing use of demerit goods and services. Reducing power of monopolies. Providing some protection for consumers and producers from problems arising from asymmetric info
24
Q
Limitations of regulations
A
- difficult for govt to determine what is correct
- need for regulation in some areas to be worldwide rather than just one country e.g. greenhouse gas emissions
- following excessive regulations expensive -> may force firms to close or move country
- monitoring can be expensive for govt and if punishment for breaking regulations isn’t harsh enough, then they may not be a deterrent and change behaviours
25
Regulations set to increase use of renewable energy
- UK govt introduced Renewable Obligation Certificates to encourage use of renewable energy sources
- Electricity suppliers given min percentage of power that must be from renewable soruces
- companies can sell their ROC certificates onto suppliers
- suppliers that fall short have to pay financial penalty. Money raised from penalties distributed between suppliers who did reach target
26
Deregualtion
- removing or reducing regulations. Removes some barriers to entry therefore increases competition and tackles market failure
- of ten used alongside privatisation - prevents private public monopoly becoming private monopoly
27
Advantages of deregulation
- improves resource allocation. Markets more contestable -> new entrants -> prices fall closer to MC as output increases
- prevents private monopolies
- improves efficiency by reducing amount of red tape and bureaucracy
28
Disadvantages of deregulation
- difficult to deregulate natural monopolies as these need large infrastructure therefore only need one of them
- cant fix other market failures e.g. negative externalities, consumer inertia, or immobile factors of production
- less safety and protection for consumers
29
Competition policy
- aims to protect interests of consumers by promoting competition and encouraging market to function more efficiently
30
What the European Commission and UKs Cmpetition and Markets authority look for to determine unfair monopolistic behaviour
- mergers - may choose to stop merger that would give firm too high market share
- agreements between firms - agreements involve price fixing, splitting markets, or limiting production are anti-competitive, cause market inefficiency and unfair to consumers
- opening of markets to competition - to prevent private public monopolies becoming private monopolies
- financial support from govts (European Comission only) - may give firms unfair advantage over firms in other countries
31
Effectiveness of competition policy
- effectiveness determined by info available - decision on whether behaviour is anti-competitive or unfair determined by info available
- if info reliable - intervention will improve efficiency, allocate resources more effectively and improve fairness to consumer
- costs of competition policy outweighed by benefits usually
32
Competition policies
- price caps - 1) RPI - X - firms must make real price cuts. RPI = Inflation. X= efficiency improvements govt/regulating body expects to make. 2) - RPI - X + K - commonly used in water industry. K = amount of investment firms will need to make in order to achieve efficiency improvements
- govt/regulating body could monitor prcies so they stay fair
- regulations to ensure quality standards, such as in food production or construction
- regulate profits using windfall taxes on 'excessive' profits - prevent monopoly power but reduces their incentive to improve efficiency
- setting performance targets with penalties if not received
33
Tradable Pollution Permits
- govt will set optimal level of pollution and allocate permits that allow firms to emit certain amount of pollution over period of time
- can trade permits -> firm with low emissions can sell permits to other firms who want to buy permits to allow them to pollute more
- use market mechanism
- EU emissions trading system uses this system; permits called emissions allowances. These distributed between EU member govts -> allocated to firms -> each year number of allowances reduced -> gives incentive to lower emissions -> firms can invest in emission saving schemes outside EU to offset own emissions
34
Advantages of tradable pollution permits
- reduce pollution to an acceptable level -> encourage firms to be efficient
- firms with low pollution -> can sell permits -> invest more and expand
- govts can use revenue to invest in other pollution reducing schemes
- internalise externality of pollution
35
Disadvantages of tradable pollution permits
- optimal pollution level is difficult to set -> 1) if too high, firms have no incentive to lower emissions. 2) If too low, new firms wont enter market and existing firms may relocate -> harming economy. 3) can lead to govt failure
- high levels of pollution in specific areas may still exist -> harmful to environment
- there are administrative costs involved in such schemes, to both govts and firms
36
Extension of property rights
- tackles market failure of absence of property rights
- owners of rights can charge consumers and producers for using property and sue if permission hasn't been granted -> negative can reduce effect of negative externalities
- could improve management of resources so they'll last longer
- negative externalities more carefully monitored and regulated
37
Disadvantages of extension of property rights
- can be difficult for govt to extend property rights
- externalities can affect more than one country
- high costs of suing can put off organisations from taking action to uphold rights
- difficult to put value on use of property
- difficult to trace source of environmental damage
38
Evaluation of nationalisation
+ govt can ensure goods and services the country needs are provided
+ govt can set output and prices of an industry at level that most benefits society
+ can be easily regulated so they act in best interest of consumers
+ can pay public sector workers fair wage
+ greater EOS
+ can pay suppliers fair price
- inefficient -> no incentive to reduce costs and make profit
- little incentive to act prudently -> firm will know govt and tax payers can bail them out
39
Government failure
- misallocation of resources and net welfare loss as a result of govt intervention
- can cause market distortions rather than removing them
- excessive bureaucracy can lead to govt failure
- conflicting policy objectives
- inadequate info
- administrative costs
- regulatory capture
40
How excessive bureaucracy leads to govt failure
- > red tape can interfere with forces of S+D -> market inefficiency
- > lots of red tape -> time lags -> govt cant respond quickly to needs -> country at competitive disadvantage to countries that respond quickly
- > bureaucracy can lead to lack of investment and prevent economy from working at full capacity
41
How conflicting policy objectives leads to govt failure
- > govt effort to achieve objective may have negative impact on another
- > politicians constrained by what is politically acceptable
- > govts often favour short term solutions as theyre under pressure to solve problems quickly
42
How inadequate info leads to govt failure
- > imperfect/asymmetric info means its difficult to assess extent of market failure -> hard to put value on govt intervention needed
- > govt may not know how consumers will react
43
Administrative costs leads to govt failure
- > govt measures to correct market failure can use large amount of resources -> high costs
- > policing is expensive when needed
44
Regulatory capture leads to govt failure
- firms covered by regulatory bodies can influence decision of regulator to ensure outcomes favour companies, not consumers
45
Common Agricultural Policy (CAP)
- main aim is to correct market failure caused by fluctuating prices for agricultural products. Would provide reasonable stable income for farmers
- uses subsidies, buffer stocks, and tariffs on imported goods
46
Problems with CAP
- encourages increased output -> environmental damage from greater use of intense farming methods and chemical fertilisers
- large amounts of wasted food products -> excess is destroyed
- can be argued welfare gain for farmers < welfare loss to consumers
- min prices -> oversupply of products -> have to be bought and stored by govt -> sell these stocks at low price outside EU -> farmers outside EU cant compete
47
Road Congestion Schemes
- method of reducing external costs linked to road congestion and pollution that it creates. Also called road pricing
- charge users to travel on roads where congestion is problem
- charge needs to be set for socially optimum level of traffic. Working out that charge can be difficult
- Impacts of wrong charge - 1) Too low a price -> limited impact on traffic levels 2) Too high a price -> too few cars in area -> reduced trade for businesses within area -> also causes congestion in other areas
