Microeconomic Govt Intervention Flashcards
(30 cards)
What is market failure?
An inefficient allocation of goods and services in the market where the price mechanism fails to account for all necessary costs and benefits.
Market failure occurs when resources are not used optimally, leading to issues like lack of public goods, underproduction of merit goods, overconsumption of demerit goods, and information failure.
What are public goods?
Goods that are non-excludable and non-rival, meaning they are consumed collectively and cannot be restricted to paying customers.
Examples include police force, national defense, fire protection, street lights, roads, and flood control systems.
What problem arises from public goods?
The free rider problem, where individuals benefit from goods without contributing to their cost.
For example, street lighting benefits everyone, regardless of who pays for it.
What is opportunity cost in the context of public goods?
The trade-off of resources that could be used in other areas when funds are allocated to public goods through taxation.
What are demerit goods?
Goods that are deemed undesirable for consumers, leading to overconsumption due to lack of information.
Examples include alcohol and tobacco.
Why do governments intervene in the market for demerit goods?
To protect public health and well-being, promote a healthier workforce, and reduce healthcare spending.
What are merit goods?
Goods that are more beneficial to consumers than they realize, often underproduced by the private sector due to information failure.
Health care and education are typical examples.
What is the effect of government provision on merit goods?
Governments can correct market failure by providing merit goods directly or subsidizing their provision to ensure adequate supply.
What are maximum price controls?
Legally fixed prices that cannot exceed a certain amount, intended to protect low-income households.
These are often set below the equilibrium price.
What is an Ad Valorem tax?
A tax that is a percentage of the price charged by the retailer.
An example is the Goods and Services Tax (GST) in New Zealand.
What is the impact of an indirect tax on supply?
It reduces supply by increasing costs to suppliers, typically leading to higher prices for consumers.
What is a subsidy?
Direct payments made by governments to producers to keep prices down, encourage consumption, and provide services the free market won’t.
Subsidies can also contribute to equality and reduce dependence on imports.
What are buffer stock schemes?
A system designed to stabilize prices by buying and selling stocks of products based on market conditions.
What is the Gini Coefficient?
A numerical measure of income inequality ranging from 0 (perfect equality) to 1 (perfect inequality).
What are some economic reasons for inequality of wealth?
- Lack of formal employment opportunities
- Poor vocational training
- Lack of investment in education and health
- Low savings rates
- Lack of available credit
What are minimum price controls?
Legally fixed prices that cannot fall below a certain amount, acting as a price floor.
These are often set above the equilibrium price.
What issues can arise from minimum price controls?
They can lead to inefficiencies, surplus supply, and potential black markets.
What is the role of government in providing information?
To reduce information failures that lead to underconsumption of merit goods and overconsumption of demerit goods.
What is the relationship between income and wealth?
Income is the flow of earnings from production factors, while wealth is the stock of assets accumulated over time.
What is a major barrier to future economic growth and development?
Inequality of income and wealth
This inequality is recognized by economists as a significant obstacle.
List some economic factors contributing to income and wealth inequality.
- Lack of formal employment opportunities for young people
- Poor vocational training
- Lack of investment in education and health
- Low savings rates
- Lack of available credit for small businesses and education
- Policies to redistribute income and wealth
What is a major source of tax policies in addressing income inequality?
Redistribution of income and wealth
Countries implement tax policies to address inequality.
Why is tax collection challenging in developing countries?
Existence of an informal economy
This leads to very little tax collection.
What is one way a government can equalize the income and wealth gap?
Increasing the minimum wage
