- Economics 18

15/12/25 Subsidies

List the advantages of indirect taxes (2)

• Reduces the consumption of demerit goods, to the social equilibrium (internalises the externality).

• The tax generates revenue for the government, which can be used to further help the externality.

List the disadvantages of indirect taxes (3) (min. 2)

• Less incentive to supply (because of decrease in profit) could lead to job losses in these industries.

• Hard to calculate correct level of tax (so hard to value the externality).

• Most demerit goods are addictive (inelastic PED), so tax would have only a small change on qd.

Define subsidies (again)

Payments by governments (usually to producers), to encourage the production of a good/service.

List the main reasons for subsidies (2)

• Aims to achieve social optimum output for markets

• Used to correct market failures for positive externalities.

Name the two types of subsidies

• Producer

• Consumer

Does a subsidy decrease or increase the CoP for firms

DECREASE

Show a producer subsidy diagram

Show a consumer subsidy diagram

List the advantages of subsidies (3) (min. 2)

• Lower price encourages consumption of positive externalities.

• Changes consumer preferences, to consume goods that benefit them.

• They can support domestic industries until a firm grows, so it can compete internationally.

List the disadvantages of subsidies (3) (min. 2)

• Difficult to calculate subsidy value accurately.

• Opportunity cost of government spending.

• Encourages inefficiency of firms, who no longer have to focus on lowering costs.

Define government failure

The net welfare loss to society after government intervention; the costs of this therefore exceed the benefits that the government was aiming for.

What is the acronym for reasons for government failure

CCLIPPRD (cl-ip-urd) 🗑🗑

List the 8 reasons for government failure

• Conflicting objectives

• Cost of administration and enforcements

• Law of unintended consequences

• Imperfect information

• Political self-interest

• Policy myopia

• Regulatory capture

• Disincentive effects

Give reasons for why Government Provision/Intervention should take place instead of the Free Market (4) (min. 3)

• Market failure is corrected

• The market becomes more competitive

• Social arguments for protection + provision

• Efficiency argument

Give reasons for why the Free Market should take place instead of Government Provision/Intervention (3) (min. 2)

• The market is able to respond - price mechanism does its job (through 3 functions SIR), allocative efficiency, S and D could possibly change in the long term.

• Productive efficiency is achieved, as competition forces it to be

• Less costly and wasteful

Define immobility of labour, and what 2 things it results in

The inability to move labour from one job to another, leading to a misallocation of resources, and market failure.

Define occupational immobility of labour

Occurs when workers lack or cannot develop the skills required for the job.

Give two reasons for occupational immobility of labour

• Lack of training, education, and skills

• Lack of work experience