Unit 3, Reasons for government intervention, methods and effects of government intervention in markets, and addressing income and wealth inequality flashcards

market failure

when the free market fails to make the best use of scarce reaources

addressing non-provision of public goods

due to the free-rider problem, governments often directly provide public goods free of charge, funding them instead through taxation or other revenue sources.

addressing overconsumption of demerit goods

governments often impose regulation on demerit goods, requiring warnings and graphic photographs to combat lack of information, and may also implement taxes or a minimum price to reduce consumption.

addressing underconsumption of merit goods

governments may provide subsidies to encourage the production of of merit goods or fully take over their provision, ensuring access to essential services and promoting social welfare.

maximum price

a legal limit set by the government that prices may not exceed, aimed at making essential goods more affordable for consumers. It must be set below the equilibrium price

example of a maximum price

rent controls used to provide affordable housing for families on low incomes, or to attract key workers such as nurses and teachers to areas where the high cost of housing has caused shortages

minimum price

a legal floor set by the government that prices may not fall below, aimed at ensuring producers receive a minimum income for their goods or services. Must be set above the equilibrium price.

Ad valorem taxes

Taxes that are charged as a proportion or percentage of the price charged by the retailer

Specific taxes

Taxes that are fixed amounts charged per unit sold, regardless of the selling price

Indirect taxes in government intervention

Indirect taxes are used to discourage the production and consumption of demerit goods, they are imposed on producers but are passed on to consumers through increased prices.

incidence

the extent to which the tax burden is borne by the producer or the consumer or both

subsidies in government intervention

Used to keep the market price of essential goods down, encourage greater consumption of merit goods, and support producers economically.

examples of subsidy use

Subsidisation of staple foods to provide affordable access for low income households and subsidisation of mass transit to give low earners access to employment opportunities and to reduce road congestion and the environmental impact of road traffic

direct provision of goods and services

A government action to supply essential public or merit goods and services directly to the public, often to ensure access or affordability.

buffer stock scheme

A government program that aims to limit price fluctuations by buying surplus production and releasing stocks during shortages, thus ensuring a stable supply for consumers and stable income for producers

provision of information in government intervention

Combats information failure and thus the under consumption of merit goods and over consumption of demerit goods

examples of provision of information in government intervention

compulsory information on cigarette packets warning of the dangers of smoking, public health announcements and campaigns, nutrition and allergy information on food packaging

wealth

A stock of assets that has been built up over time, including businesses, property shares, gold and antiques

income

the flow of payments as a reward for the services of a factor of production, paid for labour as wages, salaries and bonuses

Gini coefficient

a numerical measure of income inequality

reasons for inequality of income and wealth

lack of formal employment opportunities, poor vocational training, lack of investment in education and health, poor infrastructure, ow rate of savings and inability to obtain credit

informal economy

the part of the economy that is not regulated, protected, or taxed by the government

difficulties with policies to redistribute income and wealth

large informal economies, corruption and tax evasion

minimum wage

the least amount an employer can legally pay one of its workers; usually expressed as a wage rate per hour

transfer payment

a payment made by the government to certain members of the community who may be unable to work or are in need of assistance

progressive tax

a tax for which the tax rate increases more than proportionately as the taxable amount increases, placing a heavier burden on those with higher incomes.

inheritance tax

a progressive tax on an inheritance or gift

capital tax

a progressive tax paid annually on the difference between the buying and selling price of an asset