gov. intervention

• government subsidy: a form of government support offered to producers, used to reduce the marginal cost of supply, which leads to an inc. in output at a lower market price.
• examples of government subsidies to producers: job retention scheme, grants for youth employment, construction companies, state-aid for loss making companies.
• examples of government subsidies to consumers: electric vehicles, renewable energy, food subsidies, childcare
• government subsidy graph: increase in supply, reduced price, demonstrates price to consumer without subsidy and shows the cost of the subsidy to the government in highlighted square

  
• subsidy on elastic demand: greater change in quantity demanded as the good/service is price responsive. A smaller change in price will have a larger effect on quantity demanded. Elastic demand may be caused by a lot of substitutes, proportion of consumer income spent on the good, the degree of necessity, life cycle of the product, wether the good is habit forming, loyalty to a brand.

  
• subsidy on inelastic demand: a small change in quantity demanded given a greater change in price. As a result of brand loyalty, few substitutes, the good may be a necessity, habit forming good, addictive good, proportion of consumer income spent on the good.

  
• Asymmetric information: information failure, when the consumers or producers don’t fully understand everything about a product 
• Indirect taxes: applied to a good or service, which increases the supply cost to producers, meaning less can be supplied at the same market.
• Taxes are given to intermediates (business)
• Specific taxes are a tax levied as a fixed sum on each physical unit of a good 
• • shows a reduction in supply and an upward shift
  • price will inc.
  • quantity will decrease
  • reduction in producer revenue

  
• indirect taxes are levied on goods which are overproduced and over consumed
• direct taxes: individual taxes on income and cannot be transferred to other people
• indirect taxes van have negative effects on low income families
• producers will have a lower producer surplus, meaning staff may be laid off or firms may move to a lower cost location
• regressive tax; will stay the same regardless of income, meaning it is more detrimental to those with a low income
• Ad Valorem Tax: a form of tax expressed as a percentage given the price of the product (VAT)

  • the tax earns increases with an increase in price of the product

  
• indirect tax on elastic demand: the demand for the good will be very responsive to a change in price, meaning the firm cannot pass the tax on and producer burden will be high

  
• indirect tax on inelastic demand: there will be little change in demand given a change in price, meaning firms can pass on the tax to consumers and consumer burden will be low

  
• progressive tax; becomes greater depending on individuals income in an attempt to distribute the burden more equally
• minimim price: a fixed price enacted by the government set above the free market equilibrium to protect producers and consumers
• • set above market equilibrium
  • a contraction of demand
  • an excess supply - inefficient allocation of resources and burdens producers or forces the gov. to intervene again (intervention buying)

  
• minimum prices are regressive for consumers
• minimum prices lead to intervention buying, potentially causing greater market failure
• minimum prices may lead to black markets due to excess supply
• maximum prices: a fixed price enacted by the government as a price ceiling to increase consumption of merit goods
• • set below market equilibrium
  • quantity demanded increases - leading to excess demand
  • price hits supply curve first - leading to a shortage

  
• maximum prices increase consumer surplus
• consumers may be forced to access alternate supply due to lack of supply, which may lead to black markets
• governments may have to subsidise firms
• Regulation: causes high barriers to entry which reduces the amount of competition, allowing a few companies to dominate and increase prices and decrease output 
• Deregulation of markets: reducing or removing government imposed restrictions on businesses with the aim ton promote competition, efficiency and innovation 
• Positives of Deregulation: increased competition, greater innovation (dynamic efficiency, economic growth from investments in capital, greater consumer choice, improved allocative efficiency
• Negatives of deregulation: may reduce safety and quality of goods, inequality as large companies can still dominate, reduces consumer protection and there may be environmental costs
• Government failure: gov intervention cause failure when it creates a greater net social welfare loss, which leads to unintended consequences often caused by information failure. 
• Examples: high-enforcement costs, conflicting policies, failure to test policies, environmental conflicts, regulatory capture (interest of large companies is put over that of consumers), black markets  
• The law of unintended consequences: the law that an action can have unintended consequences, both positive and negative
• Distortion of price signals: due to artificial changes leading to misallocation of resources and an inefficient use of productive capacity 
• information failure: inaccurate information meaning social costs and benefits are inaccurate
• government failure may be caused by conflicting interests