Government Intervention in Markets (1.4.1) Flashcards
(47 cards)
What are the 7 types of government intervention?
-Minimum price schemes
-Maximum price schemes
-Indirect Taxes
-Subsidies
-Regulation
-Tradeable permits
-Provision of Information
What’s an example of a good that is overconsumed in the economy?
A prime example is alcohol
What will happen to the price of alcohol if there is increased consumption?
There will be a competition will sellers to get the best value to attract customers. This may allow consumers to consumer alcohol at extremely low prices
What’s a way for the government to reduce this overconsumption of beer?
Minimum Price Scheme
What is a Minimum Price Scheme? What does it look like on a graph?
Sets a price floor above equilibrium to reduce the consumption of a Demerit Good or Service.
Slide 48
What do Minimum Price Schemes do to Demerit Goods?
Reduce the consumption of demerit goods and reduce exploitation of suppliers. It creates excess supply and so is bad.
How is Consumer and producer surplus affected by a minimum price scheme on a graph?
Slide 49
What are the advantages of a Minimum Price Scheme?
-Reduces consumption of Demerit goods
-Reduces exploitation of suppliers
What are the disadvantages of a Minimum Price Scheme?
-Creates Excess supply
-Prices out low income households
-Government may have to buy up excess supply
-Costly to implement and enforce
What’s an example of a need that is overpriced meaning some households can’t afford it?
Rent is a prime example. Landlords aim to make a profit and pass on any increases in utility bills onto the renter. This means that come low income households can’t achieve their own accommodation without government subsidies
What’s a solution to prevent overpriced goods/services?
Maximum Price Schemes
What is a Maximum Price Schemes?
Sets a price ceiling below equilibrium to allow low-income households to afford that good or service
Why are Maximum Price Schemes used?
When goods and services are overpriced it can often be done to Supply and Demand. Market Equilibrium can be a higher price than people are willing to pay.
What does Maximum Price Scheme look like on a graph?
Slide 50
How can a maximum price scheme increase the affordability of a necessity item?
A maximum price scheme makes a firm reduce their price by setting a maximum price that they can give their products or services. This helps to increase the affordability of an item as it reduces the price people have to pay and helps low income households.
What are the advantages of a Maximum Price Scheme?
-Reduces price of necessity items for low income households
-Caps prices to reduce exploitation of consumers
What are the disadvantages of a Maximum Price Scheme?
-Creates Excess demand
-Black markets for resale
-Less incentive to supply goods/services so quality falls
-Costly to implement and enforce
What’s a real-life example of a Maximum Price Scheme in the UK?
Energy Price Cap which makes a maximum price for Gas and Electricity. This makes it more affordable energy for households.
What’s a buffer stock scheme?
Where both maximum and minimum price schemes are implemented at the same time. This is often the case with agricultural products whose prices fluctuate massively.
What are indirect taxes?
Taxes that are levied on goods and services rather than directly on individuals or income. These taxes are not paid directly by the taxpayer to the government, but are instead passed on by producers or sellers to the consumers as part of the price of goods or services.
How are Indirect Taxes a type of government intervention?
When the good has a negative externality, the government can introduce indirect taxation to prevent market failure. This will cause a fall in supply and increase the costs to the individual, so supply shifts to S2 (left)
What are the advantages of Indirect Taxes?
-It iternalises the externality- market now produces at social equilibrium position and social welfare is maximised
-Raises gov revenue
What are the disadvantages of Indirect Taxes?
-Difficult to know the size of the externality and so difficult to target the tax (Imperfect information)
-Could be conflict between gov goal of raising rev and solving externality
-Could lead to creation of black market
-Taxes are politically unpopular so governments may be reluctant to introduce them
-They are regressive meaning the poor spend a larger proportion of their income than the rich
What is a subsidy?
Financial assistance provided by the government or other authorities to support or promote specific sectors, industries, or individuals. It is essentially a form of economic aid designed to reduce the cost of a product or service, encourage production, or make certain goods more affordable for consumers.
