Theme 1: Government Intervention Flashcards

1
Q

Why do governments intervene?

A

To correct market failure

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2
Q

Two types of indirect tax

A

Ad valorem and specific

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3
Q

Ways in which the government corrects market failure?

A

Indirect tax, subsidies, max and min prices, tradeable pollution permits, provision of public goods, provision of information and regulation.

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4
Q

Where does max price have to be?

A

Set below the free market price

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5
Q

Where does min price have to be?

A

Set above the free market price

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6
Q

Key example of minimum price

A

national minimum wage

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7
Q

Advantages of tradeable pollution permit

A

Benefit environment, government raise revenue and raises revenue for greener firms.

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8
Q

Disadvantages of tradeable pollution permit

A

Firms may relocate. Pass higher costs onto the consumer. Competition could be restricted if permits create a barrier to entry. Expensive to monitor.

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9
Q

How does state provision of public goods correct market failure?

A

Government provides the public goods that have positive externalities.

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10
Q

How does provision of information correct market failure?

A

Government’s ensure that there is no information failure so consumer and firm can make informed economic decisions.

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11
Q

How does regulation correct market failure?

A

The government could use laws to ban consumers from consuming a good that has negative externalities.

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12
Q

Net welfare loss

A

An overall loss of economic welfare when compared to the starting position

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13
Q

4 causes of government failure

A

Distortion of price signals -Unintended consequences -Excessive administrative costs -Information gaps

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14
Q

Distortion of price signals

A

The actions of government which distort the operation of the price mechanism and so misallocates resources.

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15
Q

unintended consequences

A

the unexpected and unplanned results of a decision or action

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16
Q

Excessive administrative costs

A

The social benefits of a policy might not be worth the financial cost of administering the policy.

17
Q

Information gaps

A

Where consumers, producers or the government have insufficient knowledge to make rational economic decisions.