1.4 Government Intervention

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1.4.1 Why do governments intervene in markets?
To correct market failures.
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1.4.1 What is indirect taxation?
A tax on spending. There are specific taxes which are fixed amounts added per unit of a good or service. Ad-valorem taxes are a percentage of the price of the good or service. Increases a firms cost.
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1.4.1 What is a direct tax?
A tax on income.
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1.4.1 What is a progressive tax?
As incomes rise, the percentage of income taxed increases.
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1.4.1 What is a proportionate tax?
As incomes rise, the percentage of income taxed stays the same.
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1.4.1 What is a regressive tax?
As incomes rise, the percentage of income taxed decreases.
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1.4.1 What are advantages of indirect taxes?
Revenues for governments can be hypothecated to specific areas of spending. It can correct welfare loss from negative externalities. Helps to internalise external costs.
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1.4.1 What are disadvantages of indirect taxes?
If placed on inelastic goods, the quantity demanded will not fall much unless taxed very high. Difficult to place an accurate value on external costs. May reduce international competitiveness.
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1.4.1 What are subsidies?
A payment made to producers to encourage increased production of a good or service.
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1.4.1 What are advantages of subsidies?
Can increase the consumption of goods with positive externalities. Reduces the price of a good making it more affordable to those on lower incomes.
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1.4.1 What are disadvantages of subsidies?
Difficult to place a monetary value on the size of the external benefits. Opportunity cost. Firms can become reliant on subsidies encouraging productive inefficiencies and reducing international competitiveness. Artificial trade protection (CAP).
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1.4.1 What is a maximum price?
A ceiling above which prices are not permitted to rise. It is placed above the free market equilibrium price.
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1.4.1 What are advantages of a maximum price?
Makes it more affordable. Can reduce the ability of firms with monopoly power to exploit customers through higher prices.
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1.4.1 What are disadvantages of a maximum price?
Creation of excess demand; queues, shortages and waiting lists. May lead to black markets for goods and services.
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1.4.1 What is a minimum price?
A price floor which establishes a legal level below which prices are not permitted to fall. It is placed above the market equilibrium price.
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1.4.1 What are advantages of a minimum price?
Gives producers a guaranteed minimum income which helps generate a reasonable standard of living. Encourages production of essential products. Excess supply can be bought and stored for future shortages.
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1.4.1 What are disadvantages of a minimum price?
Higher prices reduce disposable income. Encourages over-production and inefficiencies. Opportunity costs to governments when purchasing excess supplies. Reduces international competitiveness. May encourage black markets.
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1.4.1 What is a trade pollution permit?
The right to use or exploit an economic resource to a specific degree. The government controls how many permits there are so limits the maximum amount of pollution
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1.4.1 What is state provision of a public good?
The government will organise the provision of a public good and fund it with tax revenue or they may pay a private sector to wholly or partially produce the good.
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1.4.1 What is provision of information?
Governments intervening to fill information gaps. Eg. compulsory labeling on food, health warnings on cigarettes, advertising. Drawbacks include the costs and lack of long-term effectiveness.
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1.4.1 What is regulation?
Rules or laws used to compel or ban the actions of economic agents in order to reduce market failure. Eg. banning smoking in public places, setting up regulatory bodies.
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1.4.2 What is government failure?
When government intervention in a market reduces overall economic welfare.
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1.4.2 What are causes of government failure?
Inadequate information. Unintended consequences Distortion of price signals. Excessive administrative costs. Regulatory capture.
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Card 2

Front

1.4.1 What is indirect taxation?

Back

A tax on spending. There are specific taxes which are fixed amounts added per unit of a good or service. Ad-valorem taxes are a percentage of the price of the good or service. Increases a firms cost.

Card 3

Front

1.4.1 What is a direct tax?

Back

Preview of the front of card 3

Card 4

Front

1.4.1 What is a progressive tax?

Back

Preview of the front of card 4

Card 5

Front

1.4.1 What is a proportionate tax?

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