Just All Micro Flashcards

Question

What is indirect tax?

Answer 1

It’s a tax on expenditure that increases costs of production for firms. Because if this, firms pass on costs to consumers by raising their prices. Eg. VAT on alcohol, tobacco and fuel.

Answer 2

A form of government intervention. Subsidies are a money grant from the government to firms in order to reduce costs of production and increase output. The goals: -Solve market failures -Increase affordability

Answer 3

A fixed price (price floor) enacted by the government usually set above the equilibrium market price It’s is mainly used to: - protect producers from price volatility - solve market failure

Answer 4

A fixed price (price ceiling) enacted by the government usually set below the equilibrium market price. It is used to increase affordability of necessity goods/services.

Answer 5

Allocative efficiency occurs when Price = Marginal Social Benefit (MSB) = Marginal Social Cost (MSC). This means resources are distributed to produce the goods most wanted by society, maximising total societal welfare.

Answer 6

When the free market fails to allocate scarce resources at the socially optimum level of output

Answer 7

A cost or benefit to a third party not involved in the economic transaction. Can be positive or negative, in production or consumption.

Answer 8

Public goods are non-rivalrous (one person’s use doesn’t reduce availability to others) and non-excludable (you can’t stop people from using it). This leads to the free rider problem where people benefit without paying.

Answer 9

When one party in a transaction has more or better information than the other, leading to poor decision-making and market failure.

Answer 10

Monopoly power allows firms to restrict output and raise prices, reducing consumer welfare and leading to underconsumption.

Answer 11

Free markets may lead to large income/wealth gaps, causing social issues and limiting access to basic goods and services for the poor.

Answer 12

The level of output where marginal social benefit (MSB) = marginal social cost (MSC). This is the most efficient allocation of resources for society.

Answer 13

1. Externalities (side effects of production/consumption on third parties) 2. Public Goods (goods that are non-rival and non-excludable, like streetlights) 3. Information Gaps (when one party knows more than the other, e.g. used car market) 4. Monopoly Power (when firms restrict supply to raise prices and reduce choice) 5. Factor Immobility (when labour or capital can’t move to where it’s needed most) 6. Inequality (unfair distribution of income or wealth, leading to welfare loss)

Answer 14

(when consumers/firms act in their own benefit and ignore wider effects) can lead to: Negative externalities (e.g. pollution from driving a car) Overconsumption/overproduction of harmful goods (like junk food or cigarettes)

Answer 15

(when consumers or producers don’t have full info) leads to: Underconsumption of beneficial goods (e.g. vaccines) Overconsumption of harmful goods (e.g. smoking despite health risks)

Answer 16

In production: A negative externality is a cost to third parties (people not directly involved in a transaction), as a result of the actions of producers. In consumption: A negative externality is a cost to third parties (people not directly involved in a transaction), as a result of the actions of consumers.

Answer 17

In consumption: A positive externality is a benefit to third parties (people not directly involved in a transaction), as a result of the actions of consumers. In production: A positive externality is a benefit to third parties (people not directly involved in a transaction), as a result of the actions of producers.

Answer 18

A good that provides more benefits to society than people realize – so it tends to be under-consumed. Because of imperfect information (information failure and asymmetric info). Example: Education or healthcare.

Answer 19

A good that causes more harm to society than people realize – so it tends to be over consumed. Because of imperfect information (information failure and asymmetric info). Example: Cigarettes, alcohol or junk food.

Answer 20

Public goods are goods that free markets struggle to provide efficiently because they suffer from the free rider problem, which leads to a missing market (where no firm is willing to supply them).

Answer 21

Non excludable: no one can be prevented from using the good (streetlights: everyone benefits even if they don’t pay taxes). Non rival: one person’s use doesn’t reduce the amount available for others (national defence: protects everyone equally). Examples: -flood defences -road signs and street lights -beaches

Answer 22

Since public goods are free to use, people can benefit without paying, so firms have no incentive to provide them. - leads to missing market (goods aren’t provided at all or are under provided) - government intervention needed (taxes fund these goods)

Answer 23

Aka. Partially public Quasi-public goods have some but not all characteristics of public goods. They can cause market failure because they’re: • Partially non-rival (one person’s use slightly affects others) • Partially non-excludable (it’s hard, but not impossible, to stop people from using them) Some goods are not fully public because they can become excludable or rival in some situations. - roads (toll roads are excludable) - beaches (private resorts restrict areas) Externalities can be linked to this.

Answer 24

Natural resources that no one owns, but everyone can use them. This often leads to overuse and depletion due to self interest.

Answer 25

Non excludable: everyone can use Rivalrous: if one person uses them, it there’s less available for others Examples: - timber (forests) - seafood, minerals (seas) - oxygen (air)

Answer 26

Since no one owns these Common Access Resources, people overuse them for personal gain (self interest), leading to depletion and long term scarcity. Eg. Overfishing Self interest: because no one has the incentive to preserve the resource.

Answer 27

1. Government regulation (like fishing quotas) 2. Property rights (assigning ownership to encourage sustainability) 3. Taxes or permits (eg. Carbon taxes to reduce pollution)

Answer 28

When the costs of government intervention outweigh the benefits, leading to a worse allocation of scarce resources and harming social welfare. (Basically when intervention makes things worse)

Answer 29

These could be used to talk about wether government intervention is really necessary or not: 1. Information failure: - difficulty in valuing externalities 2. Admin and enforcement costs very high: - policies like regulation, subsidies, state provision, and price controls can be costly to implement and monitor 3. Unintended consequences: - black markets may form if policies restrict goods (eg price controls leading to illegal sales) - strict regulations have impact on firms because regulations may increase costs, reducing employment - they may impact poor because policies don’t always benefit vulnerable groups 4. Regulatory capture: - when government regulators act in the interest of businesses and not public

Answer 30

Subsidies are financial support given by the government to producers or consumers to lower the cost of producing or buying a good or service.

Answer 31

It increases the price of goods with negative externalities, reduces overconsumption, brings market closer to the socially optimum level, and generates revenue to tackle the externality’s effects.

Answer 32

Subsidies are commonly used to correct under consumption and underproduction, typically for goods with positive externalities (eg healthcare, education, renewable energy, etc). Benefits: - lowers cost of production - price falls and quantity increases - solves underconsumption/underproduction - improves allocative efficiency and welfare

Answer 33

1. Cost - can be expensive for the government 2. Difficult to set the right level - risk of over/under subsidising 3. Inefficient use - firms may misuse or not pass the subsidy to consumers 4. Price inelastic demand - quantity might not increase much despite lower prices

Answer 34

Government rules or laws used to control the behaviour of firms and consumers, often to correct market failure.

Answer 35

1. Because it’s a non-market based approach: - direct control 2. Because It’s a command/control approach: COMMAND: - bans (public smoking bans etc) - limits (age limits on alcohol, time limits on when it can be served, etc) - caps (emission caps, caps on the amounts of fish fisherman can catch, etc) - compulsory (compulsory graphic images on smoking packs, vaccinations, etc) - innovative regulations (getting paid for recycling bottles, etc) CONTROL: - enforcement (otherwise no one will follow it. Needs to be a strong incentive to check them) - punishment (fines, bad publicity, jail, bans, etc) 3. Because there is Incentive to change behaviour: - consume/produce more - consume/produce less 4. Because it Helps solve market failures: - Corrects Negative Externalities with regulation by putting limits. Eg, pollution from factories can be limited to help environment and people… 5. Because it promotes Allocative efficiency and welfare gain: - regulation moves the market closer to the socially optimal point. There’s no overproduction or underproduction

Answer 36

1. Cost - regulation is costly: enforcement cost, if government can’t afford then regulation will be poor. 2. Setting the right regulation - is the command going to be set at the right strictness. If set too strict, there will be many unintended consequences (increasing costs for firms, reduce production and therefore unemployment, shutdown completely etc.) (if too strict people will be using black market which is dangerous for consumers and loss of tax revenue for government, meaning more policing necessary for the government, increasing costs etc.) (firms may try finesse the system) 3. Black markets and unintended consequences 4. Not fair on all firms who may have less resources and other things than other firms.

Answer 37

When the government provides goods or services directly to consumers, usually free at the point of use (you don’t pay when you use it). Good because provides merit goods and public goods. Bad because it’s expensive and will lead to excess demand.

Answer 38

It’s used to discourage the consumption of demerit goods. It works by a minimum price being set above equilibrium price, so legally firms can’t sell below it. As the min price is above equilibrium -> Demand will contract -> consumption will be discouraged -> quantity will fall to the socially optimum level of output.

Answer 39

1. Inelastic demand -> the quantity demand might not fall enough to solve market failure 2. Min. price is regressive -> it will take a greater proportion of the income of the poor 3. Black markets -> illegal selling at lower price. Consumers finding alternatives which might be dangerous. Possibilities are endless (bad ones), which make the market failure worse. Can also lead to gov failure. 4. Set at right level & Unintended consequences on firms -> prices set too high which can make the externalities even worse, firms may suffer. For example may have to leave the country, shut down, unemployment…

Answer 40

Used in markets where the price in the market is deemed too high by the government. By imposing maximum price below the equilibrium, we are promoting more equity and encouraging more consumption of essential goods/services. P1 goes down and Qd increases. (Extension of demand)

Answer 41

Shortage is created: yes there is an extension of demand HOWEVER there is also a contraction of supply. This creates an inefficiency in the market. Because demand>supply. This leads to people going onto the black market. Because many people are willing to provide this good/service ABOVE the maximum price (price ceiling), and also because demand is so much higher than the supply. This is dangerous (black market possibilities are endless in a bad way). PURE GOV FAILURE!!!! Needs enforcement Hard to set right price Costs to government if they step in to supply more of this good/service

Answer 42

Information provision is when the government provides access to accurate information to encourage/discourage consumption The government provided info through: - advertising - education - labels, health warnings, etc For merit and demerit good market failure

Answer 43

Cost: gov has to spend money on ads, education, campaigns etc No guarantee it works: people may ignore the info (like smoke warnings) Slow results: long run not short run

Answer 44

Property rights are the legal rights to own, use, or sell a resource (land, water, air, etc). Assigning Property rights helps to solve Tragedy of the Commons based market failure. When someone owns a resource, they have an incentive to protect it (for sustainability, preserving a resource for personal gain etc). Negative externalities are internalised, meaning only the owner will be affected by anything like overuse and pollution etc. If rights are enforced, the overused resource is reduced to a socially optimum level.

Answer 45

1. Are they going to be fairly distributed? Who gets ownership of the air for example? 2. Enforcement costs: laws, regulations and monitoring is expensive (for example if the government can’t afford enforcement and let’s say there is mass trespassing). 3. Equity issues: is it fair that one person/company gets ownership over a natural resource? Whoever gets the rights gets significant power (For example a village wants access to a river to bathe in it, however a company wants access to dump waste, who gets ownership? How would this affect everyone else? Maybe the company employs people from the villiage and won’t be able to etc etc etc).

Answer 46

Free Markets are E.P.I.C: E - Efficiency: • free markets promote allocative efficiency • leads to dynamic efficiency: long term investment and innovation P - Productivity: • firms aim to be more productive to lower costs and stay competitive I - Incentive: • strong profit incentives drive innovation, risk taking, and better performance C - Competition: • competition leads to lower prices, better quality, and greater consumer choice Other benefits: - freedom of choice for consumers and producers - no risk of government failure because of no government intervention - job creation because of high quantity

Answer 47

1. Market failure: - there may be a dominant firm (monopoly or oligopoly) - there may be imperfect information so consumers can’t make rational decisions and consume demerit goods or under consume demerit goods - if firms focus on profit, public goods won’t be allocated and externalities will be ignored 2. Inequity - prices at equilibrium may not be fair, especially for necessities, may exclude many consumers that cannot afford that price 3. Excessive profiteering: - firms focus on profit in ways that may not be moral in society, maybe exploiting consumers, all for high profits 4. Creative destruction: - new innovations replace old industries, causing job losses 5. Price volatility: - prices can fluctuate heavily based on supply/demand (eg. Food and oil etc) creating instability. Mostly For inelastic goods because of necessity

Answer 48

The concentration of production on a narrow range of goods or services to improve efficiency and output.

Answer 49

Breaking down the production process into separate tasks to improve productivity.

Answer 50

Advantages: 1. Higher output (leads to trade & growth) 2. Wider range of goods/services 3. Greater allocative efficiency Disadvantages: 1. Finite resources (can run out) 2. Changes in fashion/tastes (risk of obsolescence) 3. De-industrialisation (decline in manufacturing sectors)

Answer 51

Advantages: 1. Workers become highly productive (due to repetition) 2. Lower prices and higher quality/choice for consumers Disadvantages: 1. Demotivation of workers (repetitive tasks) 2. Risk of long-term unemployment (due to overspecialisation)

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