Unit 8, Government policies to achieve efficient resource allocation and correct market failure, equity and redistribution of income and wealth, and labour forces and government intervention flashcards

Pigouvian tax

A tax imposed on activities that generate negative externalities, aimed at increasing the cost of the activity to reflect its social impact and encourage a reduction in its occurrence.

ideal size of an indirect tax

equal to the marginal external cost of the activity, effectively internalizing the externality and achieving optimal resource allocation.

issue with size of indirect taxes

it is difficult to know or estimate the exact value of the tax that is to be imposed to reflect the true marginal external cost, which can lead to misallocation of resources;

ideal PED for indirect taxes

price elastic demand, to prevent producers passing the cost on to consumers, and thus reducing production levels, making the tax more effective.

regulations

a wide range of legal and other restrictions that come from government or regulatory bodies

property rights

where owners have a right to decide how their assets may be used, they can be given to a firm or to individuals

firm control of property rights

if a polluting firm has property rights the firm could be paid to reduce the scale of its activities, where the amount should be equal to lost profit, or move location, where the amount should be equal to the cost of moving, along with threat of new regulation, leading to negotiations

individual control of property rights

if individuals have property rights they may sue a polluting firm for compensation if they are affected by negative externalities, which should be equal to the marginal external cost, however there is a difference in bargaining power and individuals often require join action

pollution permit

a form of license given by the governments that allow a firm to pollute up to a given level, typically regulated through a market system where permits can be bought or sold to control overall pollution levels.

measures to combat negative production externalities

specific and ad valorem indirect taxes, regulations, property rights, and pollution permits

specific indirect tax effect on consumers

increases the price of goods, leading to a decrease in quantity demanded, this can help reduce consumption and mitigate negative externalities.

price controls in government intervention

a minimum price can be set that increases the price to consumers above the point where MPB = MSC to prevent further consumption of goods that generate negative externalities, however, demand for demerit goods is often price inelastic

provision of information

when governments directly provide information to correct market failure, e.g. warnings on cigarette packets

production quota

a physical limit on what can be produced, if the quota is set at a low level the price of the good increases, reducing the amount consumed

measures to combat negative consumption externalities

specific indirect taxes, price controls, provision of information, and production quotas

subsidies in accounting for externalities

Encourages production of goods by lowering production costs, lowering MPC to MSC, additionally by increasing supply it lowers prices, encouraging consumption of goods with positive externalities

measures to encourage positive production externalities

subsidies and provision of information

measures to encourage positive consumption externalities

direct provision and subsidies

nudge theory

influencing choice by ‘nudging’ individuals towards making more effective decisions that improve their welfare without restricting choices, this is done by providing additional information

direct provision of goods and services

public and merit goods are directly provided to encourage consumption of goods and services with positive externalities or imperfect information regarding them, or to reap wider economic benefits through improvement of human capital

nationalisation

when a government takes over a private sector business and transfers it to state ownership, this often occurs to ensure that services are provided in the public interest, especially in sectors like utilities and transportation

privatisation

the process of transferring ownership of a public sector enterprise to private owners, aimed at improving efficiency and increasing competition in the market, thus reducing prices

government failure

when government intervention to correct market failure leads to a net loss of economic welfare

causes of government failure

imperfect information, unintended consequences and policy conflict

imperfect information in government failure

there may be a lack of information about the true cost or value of a negative externality, leading production to decrease to an even more inefficient level; or governments may lack information about the consumer demand for a merit or public good, leading to over or underprovision and a worse allocation of resources

unintended consequences in government failure

the imposition of taxes can distort incentives, leading to decreased supply or demand, which may exacerbate the very market failure the government aimed to correct; economic policies may also be designed to help governments retain power rather than maximise economic efficiency

policy conflict in government failure

any type of tax will have a distributional impact that affect different groups of people differently and may increase existing inequality; subsidies on fossil fuel power sources may increase competitiveness and keep workers in jobs, but will have a negative environmental impact

equality

where everyone is treated in the same wayeff

efficiency

where scarce resources are being used to produce maximum output

equity

the fair distribution of resources and opportunities among individuals.

horizontal equity

where consumers and others with the same circumstances should pay the same level of taxation

vertical equity

where taxes should be fairly appointed between the rich and the poor in a society to ensure that those with greater ability to pay contribute a larger share.

extreme poverty

the international poverty line of living on less than $1.90 per day

absolute poverty

when household income is below a certain level that makes it impossible for a person or family to meet the basic needs of life such as food, housing, water, healthcare and education

relative poverty

where household income is 50% or less than the average income, there is just enough income to meet basic needs

means-tested benefits

benefits that are paid only to those whose incomes fall below a certain level, however they can cause a disincentive to work

poverty trap

when an individual or a family are better off on means-tested benefits, can occur when there is a low income tax threshold paired with generous means-tested benefits up to a certain level of income

universal benefits

benefits available to all irrespective of income or wealth, however they can be expensive to operate as those who do not need it receive it

negative income tax

money paid out by the government to those earning below an agreed annual fixed benefit limit

negative income tax explanation

there is a flat rate of income tax and a fixed universal annual benefit, if the tax paid on earnings is less than the fixed benefit (negative), the individual receives the difference from the government, if difference is positive, the difference is paid to the government

marginal revenue product

the addition to total revenue as a result of employing one more worker

optimum level of labour for a firm

a firm should hire up until MRP is equal to the wage rate being paid

assumptions of demand for labour

the firm wishing to hire labour is operating in a perfectly competitive market; and the firm is a profit maximiser

factors determining the demand for labour

wage rate, productivity and demand for the product

demand for labour

the number of workers that firms are willing and able to hire at different wage rates.

supply of labour

the total number of hours that labour is willing able to work for a particular wage rate

factors influencing individual supply of labour

wage rate and income tax rate

factors influencing supply of labour

wage rate and skills required for an occupation,

factors influencing long-run supply of labour of an economy

the size of the population, the labour participation rate, the tax and benefit levels, and immigration and emigration

factors influencing long-run supply of labour of a firm

the net advantages of a particular job, including both monetary and non-monetary benefits

monetary benefits of a job

weekly wage or monthly salary, bonus payments, opportunities to work longer hours, and pension arrangements

non-monetary benefits of a job

hours of work, job security, holiday entitlement, promotion prospects, location of the workplace, job satisfaction, whether the work can be done from home

trade unions

an organisation of workers that aims to protect and enhance the well-being of its members through collective negotiations with employers and government

aims of trade unions

increase wages of members, improve working coniditions, secure additional working benefits, fight job losses and maintain pay differential between skilled and unskilled workers

factors affecting wage determination in imperfect markets

trade unions, government minimum wage legislation and monopsony employers

monopsony

where there is a single buyer in a market

wage differentials

difference in pay between workers with different skill sets and responsibilities

causes of wage differentials

bargaining strength, education and training, gender, hours of work and government policy

transfer earnings

the amount that is earned by a factor of production in its best alternative use

transfer earnings in labour

the minimum payment necessary to keep labour in its current use

economic rent

a payment made to a factor of production above that which is necessary to keep it in its current use

economic rent in labour

any payment to labour which is over and above transfer earnings