lesson 19 Flashcards
Should governments intervene?
What do free market economists argue?
They argue that the market mechanism, working through incentives transmitted by price signals, gives the best outcome
Should governments intervene?
What do interventionist economists argue?
They argue that markets fail and that the government can achieve a better outcome than an unregulated market
What ways can governments correct market failure?
Passing up laws
Getting rid of monopolies
Set price ceilings
Provide goods and services
Changing tax rates
Providing information
What is one of the most powerful ways a government can correct market failure?
Imposing indirect taxes
Facts about indirect tax
Indirect tax is taxes on goods and services or exercise duties (petrol+alcohol)
They can be imposed to ad Valorem (to add value)
They should be imposed as a specific tax where the amount paid per unit stays the same as the price changed
Why can indirect taxes be problematic to impose?
They can be unpopular as they drive up the prices of the goods people want
The government can get it wrong and over or under estimate the amount of tax to charge (type of government failure)
Governments can use indirect taxes to gain tax revenues
When can subsidies be used?
When there is positive externalities or information failure
Why may the government decide to nationalise industries?
To protect consumers and allow for long term planning
When can regulations and standards be used?
To overrule market forces and correct market failure
What are price controls and when are they used?
Price controls are used when the government feels that the market power is being abused
Prices may be set to a minimum (a floor price) or a maximum (a ceiling price)
If this is imposed by the government firms have not choice but to obey the law, instantly transforming the market
Various reasons why government failure may occur
Bureaucracy
Abuse of power
Lack of continuity
Information problems
