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Theme 1 - Micro
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government intervention 1.4
Economics > Theme 1 - Micro
32 cards
Cards (132)
Extending Property Rights
Water companies
are given the right to charge
companies
which dump
waste
into the
rivers
or the
sea.
A way of
internalising
the
externality.
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Tradable Pollution Permits
Pollution permits that can be bought and sold in a market. They are an attempt to solve the problem pf pollution by creating a market for it.
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Guaranteed Minimum Price
Where the
surplus output
created is purchased by a
government agency
at the
minimum
price. The main aim of such a scheme is to
protect producer incomes.
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Minimum Price
A
floor price
set by the government on a
good
or
service
,
below
which it
cannot
fall. It may be enforced through government
legislation.
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Maximum Price
A
ceiling price
set by the government on a
good
or
service
, above which it cannot
rise.
It may be enforced through government
legislation.
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Asymmetric Information
Where
consumers
and
producers
have unequal access to
information
about a
good
or
service
in the
market.
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Symmetric
Information
Where
consumers
and
producers
have
access
to the
same information
about a
good
or
service
in a
market.
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Information
Gaps
Where consumers, producers or the government have insufficient knowledge to make rational economic decisions.
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Free Rider Problem
If left to the
free market
,
public goods
would not be adequately
provided
for.
The market
fails
because
firms
cannot withhold the
goods
and
services
from people who
refuse
to
pay.
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Private Goods
Those goods that have rivalry and excludability in their consumption.
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Public Goods
Those goods that have non-rivalry and non-excludability by their consumption.
Non Rivalry
;
Consumption
of goods by one person does not
reduce
the amount available for consumption by another.
Non-Excludable
; Once provided, no person can be excluded from benefiting.
Examples
; Defense, Police Service, Street Lighting, Judiciary and Prison Service.
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Internalising the Externality
Eliminating
the
externality
by bringing it back into the framework of the
Market Mechanism.
= Creating a market for the
Externality.
Examples;
Tradable Pollution Permits
,
Extending Property Rights
,
Taxes
,
Regulation
, etc..
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Positive Consumption
Externality
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Negative Production
Externality
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Welfare Gain
The excess of social benefits over social costs.
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Welfare Loss
The excess of
social
costs over
social benefits
for a given
output.
A situation where
MSB
is ≠ to MSC and
society
does not achieve
maximum utility.
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Social Optimum Level
Marginal Social Costs
(MSC) =
Marginal Social Benefits
(MSB)
This is where
society
should be.
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Market Equilibrium Level
Marginal Private Costs
(MPC) =
Marginal Private Benefits
(MPB)
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Social Benefits
External
Benefits +
Private
Benefits.
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Private Benefits
Benefits internal
to a
market transaction
, which are therefore taken into account by the
Market Mechanism.
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External Benefits
Positive 3rd Party effects
that are
excluded
from the
Market Mechanism.
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Social Costs
External
Costs +
Private
Costs.
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Private Costs
Cost
internal
to a
market transaction
, which are therefore taken into account by the
Market Mechanism.
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External Costs
Negative 3rd Party effects
that are
excluded
from the
Market Mechanism.
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Production Externality
An external effect of production, which neither harms nor benefits the person or firm controlling the production.
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Consumption
Externality
An
external cost
or
benefit
arising from a
consumption activity.
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Externalities
The
costs
or
benefits
that are
external
to an
exchange.
They are
3rd
party effects
ignored
by the
Market Mechanism.
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Demerit Goods
A good which is over provided by the Market Mechanism and tends to yield more costs to individuals than they realize.
Examples; Tobacco, Drugs, Alcohol, etc..
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Reasons for Market Failure
-
Missing
Markets (
Merit Goods
and
Public Goods
)
- Lack of
Competition
in the
market.
-
Externalities
-
Imperfect
Market Information
-
Factor Immobility
-
Inequality
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Market Failure
A misallocation of resources caused by the Market Mechanism.
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Subsidy
A government grant to
firms
, which reduces
production costs
and encourages an
increase
in
output.
Its shown as an
outward
shift of the
Supply Curve.
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Producer Tax
Below
the original
EQ
and
above
the original
supply curve.
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Consumer Tax
Below the new EQ and above the original EQ.
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Incidence of Tax
The distribution of the tax paid between consumers and producers.
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Ad Valorem Tax
Tax levied
increases
in
proportion
to the
value
of the
tax base.
(VAT)
-
Steeper
Gradient relative to the original
Supply Curve.
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Specific Tax
The
amount
of
tax levied does not change
with the
value
of the
goods
but with the
amount
or
volume
of
goods purchased
(
Excise Duties
)
-
Parallel
to the
1st Supply Curve
View source
Indirect Taxes
A tax levied on the
purchase
of
goods
and
services.
It includes both
specific
and
Ad Valorem taxes.
Its shown by an
inward shift
of the
supply curve.
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Direct Taxes
Tax paid on
incomes
or
profits.
Example;
Income
Tax and
Corporation
Tax.
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Tax Incidence when Supply is elastic
Consumer Tax Burden
>
Producer's Tax Burden
View source
Tax Incidence when Supply is Inelastic
Consumer Tax Burden
<
Producer's Tax Burden
View source
See all 132 cards
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