Government Intervention

  • Created by: Becca_67
  • Created on: 30-12-18 08:28
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  • Government Intervention
    • INDIRECT TAXES
      • Specific
        • a fixed amount charge per unit of a good
        • causes a parallel shift left
        • Eg. Landfill Tax
      • Ad Valorem
        • charged as a proportion of the price of a good
        • causes a non-parallel shift left
      • Increase costs for producers
        • shift the supply curve left
      • Tax goods with Negative Externalities
        • to internalise the externality
        • the taxes make revenue for the government which can be used to offset the effects of the externalities
      • the amount of tax paid for by consumers depends on the PED
        • Inelastic
          • likely to be mostly passed onto the consumer
      • Advantages
        • 1. The cost of the negative externality is internalised in the price
          • THEREFORE reduce the demand
        • 2. Revenue gained can be used to offset the externalities
      • Disadvantage
        • 1. Difficult to put a value on the cost of the externality
        • 2. for inelastic goods, demand may not be reduced
        • 3. Increase costs of production
          • THEREFORE decreases a products international competitiveness
        • 4. Firms may relocate abroad
        • 5. Money raised may not be used to offset externality
    • SUBSIDIES
      • Aim of encouraging production and consumption of goods with positive externalities
      • the amount gained by the producer and consumer depends on the PED and PES
        • Consumer Gain = fall in price from P to P1
        • Producer Gain = difference between P and P2
      • Advantages
        • 1. Reduction  in Price
        • 2. Make Merit goods more affordable
          • THEREFORE increaseing demand
        • 3. can support domestic industries until it grows
          • THEREFORE it can exploit economies of scale
            • THEREFORE it can become more internationally competitive
      • Disadvantage
        • 1. Difficult to put a value on the benefit
        • 2. Opportunity Cost
        • 3. May make producers ineffiecent and reliant
        • 4. Effectiveness depends on the PED
    • PRICE CONTROLS
      • Maximum Price
        • = Price Ceiling
        • aim to increase cosumption of a merit good or make a necessity more affordable
        • set below the equilibrium creating excess demand and shortage of supply
        • Advantages
          • 1. Increase Fairness
          • 2. Prevent Monopolies exploiting consumers
        • Disadvantage
          • 1. Some people who want the good can't buy it
          • 2. Rationing Sheme may have to be introduced
          • 3. May lead to a Black Market
      • Minimum Price
        • = Price Floor
        • reduce demand and increase supply
          • THEREFORE leading to excess supply
        • The Government must buy the excess supply at the minimum price
          • They will then be stockpiled or destroyed
        • A good way to restrict Monopsony Power
        • Advantages
          • 1. Guaranteed minimum income
            • THEREFORE encourage investment
          • 2. Stockpiles can be used when supply is reduced
        • Disadvantage
          • 1. Consumers paying a higher price than equilibrium
          • 2. Inefficient allocation of resources
          • 3. High Opportunity Cost
          • 4. Waste of resources if excess is destroyed
    • STATE PROVISION
      • Governemtns use tax revenue to pay or certain goods to make them free
      • Public Goods
        • Street Lighting
        • = non-excludable and non-rival
      • Help reduce Inequalities in access
      • Redistribute income
      • Disadvantage
        • 1. less incentive to be efficient
        • 2. Lacks proit motive
          • THEREFORE fail to respond to consumer deamnds
        • 3. Opportunity Cost
    • PRIVATSTION
      • = the transfer of ownership of a firm from the public sector to the private sector
      • Private firms have Shareholders so need to maximise profits
      • PPPs = A private firm works with the Government to provide a good for the public
      • Advantages
        • 1. Increased Competition
          • THERFORE improves efficiency and reduces X-inefficiency
        • 2. Improves resource allocation
        • 3. Government gains revenue from selling firms
      • Disadvantage
        • 1. A public monopoly will become a private monopoly
          • THEREFORE extra measures are needed such as deregulation
            • THEREFORE extra costs for the government
              • THEREFORE opportunity cost
        • 2. more focus on increasing profits and reducing costs
          • THEREFORE less focus on quality and safety
    • REGULATION
      • = rules enforced by an authority
      • used to try reduce market failure and its impacts
      • How?
        • 1. Reducing the use of demerit goods
        • 2. Reducing the power of monopolies
        • 3. Providing protection from asymmetric  information
      • EG. Clean Air Act
    • TRADABLE POLLUTION PERMITS

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