government intervention 1.4

• types of govt intervention

  -indirect taxes

  -subsidies

  -max pricing

  -min pricing

  -tradable pollution permits

  -provision of public goods

  -provision of info

  -regulation
• what are indirect taxes

  taxes on expenditure
• what do indirect taxes cause

  increase in cost of supply
• what are advantages of indirect taxes

  -incentive to reduce pollution - most polluting firms pay the most

  -source of revenue for govt - used to compensate those affected by pollution

  -few administrative costs
• disadvantages of indirect taxes

  - Difficult to know how big the tax should be

  - Can be regressive

  - Can be hard/expensive to collect

  - Ineffective if PED inelastic

  - Drives up costs for firms causing them to be less internationally competitive

  - Could cause some unemployment
• what is a subsidy

  grant to businesses by govt to reduce production costs = G/S can be provided at a lower price
• what are benefits of subsidies

  -decreased costs of production

  -decreased price

  -incentive to consume

  -might help reduce inequality
• what are costs of subsidies

  -cost to taxpayer

  -if demand is inelastic, ineffective at increasing consumption

  -difficult setting appropriate subsidy
• what is max pricing

  cap set on price so it's illegal to charge above
• what are advantages of max pricing

  -more affordable

  -helps prevent higher inflation rate

  -can prevent exploitation of consumers by monopolies
• what are disadvantages of max pricing

  -excess demand may cause shortages = some consumers can't find supplies

  -producers may exit market to use resources on more profitable goods

  -significant cost to taxpayer if govt subsidize producers to maintain output
• what is minimum pricing

  minimum price consumers can charge for a product
• what are minimum prices used for

  -commodities

  -consumer goods

  -labour market
• what does a minimum price do for commodities

  acts as incentive for producers to supply sufficient quantities because they know how much they'll receive
• what does a minimum price do for consumer goods

  deters consumption away from things like alcohol
• what does a minimum price do for the labour market

  minimum wage for workers so that they aren't exploited
• advantages of minimum pricing

  -producers know how much they'll receive

  -greater certainty = producers can plan investment and output

  -can prevent exploitation of producers by wholesalers and retailers with significant buying power
• disadvantages of minimum pricing

  -if minimum price is too high, there will be surpluses

  -cost of storage for taxpayers

  -encourages overproduction and may result in allocative inefficiency

  -can mean that consumers go to black market
• what is a tradable pollution permit

  govt issued permit that allows you to pollute a certain amount, anything over the limit is fined
• advantages of tradable pollution permits


  -encourages firms to pollute less

  -low polluters can sell their permits and expand

  -fine revenue can be reinvested by the government

  -internalise the externality of pollution

  -low cost compared to regulation systems
• disadvantages of tradable pollution permits

  - Expensive to monitor and police how much pollution each firm is producing

  - Raises costs for businesses, which is passed onto consumers

  - Difficult to know how many permits a government should allocate

  -pollution still continues

  -needs to be enforced internationally to be effective

  -might decrease international competitiveness of goods
• what is state provision of public goods

  govt provide public goods through taxation - ensures product/service is provided
• what is provision of info


  information gaps are closed by publications on media, internet and in printed form. informs consumers about problems
• what is regulation


  legal regulations on activities of consumers and producers
• what are advantages of regulation schemes

  -can limit pollution

  -may act as incentive to develop new tech to reduce pollution for producers

  -can limit external costs without impacting price
• what are disadvantages of regulation schemes

  -enforcing and keeping them has costs

  -problem determining socially efficient regulation

  -limits consumer sovereignty
• what is govt failure

  when government intervention has a negative effect on consumption and output - mces further away from socially efficient point
• what are causes of govt failure

  -distortion of price signals

  -unintended consequences

  -excessive administrative costs

  -information gaps
• what is the distortion of price signals

  manipulation of prices undermines key features of price mechanism which could lead to inefficiently allocated resources
• what are unintended consequences


  govt intervention impacts something unexpected e.g. high taxes were supposed to increase tax revenue but did opposite because there was increased smuggling
• what are information gaps that cause govt failure


  when govt intervene, they are unlikely to have all info required to make correct decision
• what are various markets that govt failure may effect

  -consumer expenditure

  -agricultural stabilisation schemes

  -housing policies

  -environmental policies

  -fishing industry