Government Intervention
- Created by: ekenny5
- Created on: 29-04-22 09:10
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- Government Intervention
- Types of market failure
- factor immobility
- public goods
- under-provision
- free-rider problem
- Merit and demerit goods
- externalities
- imperfect information
- poverty and inequality
- monopoly power
- Indirect taxation
- a tax imposed on producers that can be passed onto consumers
- eg VAT, duties
- increases costs of production, inward shift of the supply curve
- increases price for consumers and reduces quantity
- depends on PED
- for inelastic goods, producers give a greater burden of the tax to consumers
- they are less responsive to changes in price
- tax is less effective as consumers pay more (regressive) and quantity is not reduced by much
- they are less responsive to changes in price
- if elastic, more of the burden is taken by producers, and is more effective as it reduces the quantity
- for inelastic goods, producers give a greater burden of the tax to consumers
- specific tax - per unit
- ad valorem - percentage tax
- what is tax rev used for?
- impact on jobs and investment
- impact on equity?
- HIDO: setting right tax rate, cost of collection, PED, costs to firms, redistributive effects
- Producer subsidy
- a payment by the gov to suppliers to reduce their costs of production to encourage increased output
- financed by general taxation or borrowing
- shift supply to the right and reduce price, so more is consumed
- - subsidies on the cost of inputs used in production, - gov grants to cover losses, - bail outs, - financial assistance (loans and grants)
- eg, childcare subsidies, wind farms, apprenticeship schemes, solar panels, electric cars
- cost: subsidy per unit x level of output. difference between equilibrium price, and price once supply has shifted
- economic justification
- help poorer families
- encourage investment
- protect jobs
- encourage arts
- improve healthcare
- evaluation of effectiveness
- do subsidies meet aims?
- effect on productivity - dependency
- cost to the government
- does it correct market failure?
- a payment by the gov to suppliers to reduce their costs of production to encourage increased output
- Price controls
- maximum price
- price ceiling - price cannot rise above a certain level
- must be set below the free market price
- excess demand
- eg rent controls, energy price caps, data roaming charges
- lead to black markets - consumers willing to pay higher than the max price use the black market
- dissuades new entrants, reduce investment
- minimum price
- price floor - price cannot go below a certain level
- must be set above the free market price
- leads to excess supply
- eg minimum wage, Scotland alcohol min prices
- depends on elasticity
- CAP - gov failure
- maximum price
- State provision
- governments providing certain goods rather than leaving it to the free market
- ensure the provision of public goods - where there is no efficient way to charge for the good
- provide merit goods such as healthcare and education
- improve equality
- usually become inefficient
- cost of operation
- Pollution permits
- firms given the legal right to pollute a certain amount
- firms can sell their permits if they pollute less than they are allowed
- creates a market for pollution permits
- provide incentives to reduce pollution
- internalise the externality
- bring to a more socially optimum level
- if too many permits are given, cost falls and less incentive to reduce pollution
- high administration costs
- Extension of property rights
- making commonly used resources such as air and water privately owned
- otherwise no-one is responsible for the damage caused or the externalities
- creating a market allows the externalities to be internalised
- tradgedy of the commons
- making commonly used resources such as air and water privately owned
- Types of market failure
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