Gov Intervention

• What does market failure provide an argument for?

  Government intervention in markets
• Why do governments intervene in markets?

  To correct market failure
• What might governments provide to correct underprovision in the free market?

  Healthcare and education
• What are indirect taxes?

  Taxes on expenditure
• How do indirect taxes affect production costs?

  They increase production costs for producers
• What is the effect of indirect taxes on market price and demand?

  Market price increases and demand contracts
• What is a demerit good?

  A good that is overconsumed and harmful
• How might the government discourage consumption of cigarettes?

  By imposing a £1 tax per packet
• What are the two types of indirect taxes?

  Ad valorem taxes and specific taxes
• What is an ad valorem tax?

  A percentage tax, like VAT
• How does the incidence of tax vary between consumers and producers?

  It can fall differently based on pricing
• What determines the incidence of tax on consumers and producers?

  The price elasticity of demand

  
• How does price inelastic demand affect tax burden?

  Consumers bear a larger tax burden
• What is the purpose of imposing indirect taxes on demerit goods?

  To discourage consumption and reduce externalities
• What is a specific tax?

  A set tax per unit produced
• How do indirect taxes affect the quantity of demerit goods consumed?

  They reduce consumption by increasing prices
• What happens to the supply curve when the tax equals the external cost?

  The supply curve becomes MSC instead of MPC
• What is a subsidy?

  A payment from the government to producers
• How do subsidies affect the production of merit goods?

  They encourage more production of merit goods
• What is the effect of subsidies on market prices?

  They lower the market price of goods
• What are the disadvantages of subsidies?

  Opportunity cost and potential inefficiency
• What is a maximum price?

  A price set to encourage consumption
• Where must maximum prices be set to be effective?

  Below the free market price
• What could happen if maximum prices are misjudged?

  It could lead to government failure
• What is the effect of maximum prices on consumer welfare?

  They can lead to welfare gains for consumers
• What is a minimum price set to discourage?

  Consumption of demerit goods
• What happens if minimum prices are set below the free market price?

  They would be ineffective
• How does a minimum wage affect employment rates?

  It can lead to a fall in employment
• What are tradeable pollution permits designed to limit?

  Negative externalities from pollution
• What can happen when governments intervene in markets?

  They can worsen existing market failures
• How do tradeable pollution permits work?

  Firms can buy and sell pollution allowances
• What is the result of government failure?

  Net welfare loss to society
• What is a potential advantage of tradeable pollution permits?

  Encourages green production methods
• What can cause a loss from government intervention?

  Ineffective intervention or harm caused
• What are the causes of government failure?

  • Unintended consequences
  • Excessive administrative costs
  • Information gaps
  • Distortions of price signals
• What is a disadvantage of tradeable pollution permits?

  Firms may relocate to avoid limits
• What is state provision of public goods?

  Government provision of underprovided goods
• What are unintended consequences in government policies?

  Unexpected reactions from producers and consumers
• What is the effect of providing public goods?

  Increases accessibility and consumption
• How can government policies be undermined?

  Consumers react in unexpected ways