Goverment Intervention and Externalities

Direct Tax

Tax on income

Indirect Tax (general)

Tax on expenditure

Exise/flat tax (indirect)

Indirect tax on an absolute amount levied per unit of a commodity.

Ad-Valorem Tax

Indirect tax, which is expressed as a proportion of the price.

What does an indirect tax mean to firms?

An indirect tax acts as an extra cost of production for the producer, leading to a leftward shift of the supply curve.

In taxes what are the two different prices and where are they?

Pp = price for producers, found below. Pc = price for consumers, found above.

Who pays the burden of the tax?

The more inelastic the demand curve is, the bigger the burden for the consumer will be.

Regressive taxation

When a tax is imposed on a product and it impacts low income households more.

Subsidies

Financial support paid by governments to firms.

Price ceiling

Legal maximum price imposed by the government.

Price floor

Legal minimum price imposed by the government.

Market failiure

The failure of market forces to achieve an efficient allocation of resources.

Carbon Taxation

A tax per unit of carbon emissions of fossil fuels.

Tradable Permits

Permits to pollute are issued by a government body which sets a maximum amount of pollution allowed.

International Agreements

Agreements between two or more countries to cooperate on economic issues, such as trade, climate policy, tax, or regulation.

Education and awareness creation

A government policy that aims to change consumer or producer behaviour through information, advertising, and public campaigns, rather than using taxes or regulations.

Goverment provisions

When the government directly supplies goods or services to the public (often for free or subsidised), especially when the market would under-provide them.

Reasons for intervention

Earn government revenue, support firms, support households, correct market failure

Inflation

Persistant increase in average price level

Overprovision

Too many resources are allocated to a goods production