Studied by 2 people
reasons for government intervention in markets
earn government revenue
support firms
support households on low incomes
influence level of production
influence level of consumption
correct market failure
promote equity
price ceiling
maximum legal price of a product imposed by law. price above which products are not allowed to charge and its always below the market price
reason for price ceiling
equity: impose on necessity
accessibility: impose price on merit good and make it more accessible to low income group
benefit of price ceiling
lower the expenditure of low income group on necessities → retain more money for investment and saving to break the poverty cycle
protection against volatile prices that harms the low income group
prevent low income group from not having enough necessity
lower the high living costs in city → attract rural urban migration
concern of price ceiling
only temporary relief
shortages
people need to queue up for a long time
discourage producer from improving the quality
encourage under supply → further increase the price
back market
government may need to intervene by rationing → opportunity cost
price floors
minimum legal price of a product et by the government → price below which producers are not allowed to charge → higher than the market price
reason for price floor
price floor on salary (minimum wage) improve income distribution equity
support the income of domestic producer
decrease the consumption of demerit goods
benefits of price floor
guarantee a minimum income of producer
protection against volatile prices
prevent producers who would not be covering costs from going out of business
support rural employment and may prevent rural urban migration
concern of price floor
temporary relief
over supply → further lower the price
opportunity cost of gov → sell the surplus
discourage producers from diversifying
indirect taxes
tax on transaction and production
reason for indirect taxes
collect tax revenue
impose indirect taxes on industries having negative externalities
decrease the consumption of demerit goods
flat rate vs ad valorem
per unit tax → fixed amount
percentage tax → proportional to the price of producer
benefit of indirect tax
gov can collect tax revenue and achieving income redistribution
decrease the production and output level of negative externalities
producing substitutes without negative externalities and achieve allocative efficiency
concern
tax is a leakage to the circular flow of income → economic growth drops
exerts inflationary pressure
lower the incentive of the producer to produce
decrease employment
producing complement will be worse off
subsidies
financial aid or support provided by the gov to an economic sector aiming to promote the economic activity and reduce production costs
reasons for subsidies
on infant and strategy industries and protect them from foreign competition
impose on industries having positive externalities
impose subsidies to increase the consumption of merit goods
benefit of subsidies
reduces cost and increase profitability → incentives firms to produce more
lower the production costs (subsidy on raw material) → decreasing price of the product produced
more competitive → increasing exports and reducing imports
increase employment
concern of subsidies
opportunity cost involved
overall welfare loss and allocative inefficiency
distorts the pattern of trade
domestic firms may seen as protection → rise to retaliation form trading partners
direct provision of welfare services
gov invest in social health insurance organization→ direct provision of healthcare
education → gov run or subsidised
legislation
market failure
too much or too little products or services are produced and consumed → socially undesirable and allocative efficiency, socially optimum level of output is not achieved
welfare loss
external costs on the third party that is not involved in the market
advertising
market communication of sending out non-personal message to sell a product
carbon tax
indirect tax on the economic activites involving the emission of carbon dioxide → aim to reduce the negative externalities produced by these economic activites
regulation
rules imposed by the government aiming to modify the economic behaviour of people and firms
merit goods
benefit to the society which is not taken into account by the consumer → positive consumption externalities to the society
demerit goods
cost to the society which is not taken into account by the consumers → negative consumption externalities to the society
sustainability
development that meets the needs of the present generation without compromising the ability of future generations to meet their needs
rivalrous resources
resource which cannot be consumed by two or more people at the same time
non-rivalrous resources
can be consumed by any number of people at the same time
excludable resources
a resource which can excluded people from consuming it
non-excludable resources
impossible to exclude people from consuming it
common pool resources
rivalrous
non-excludable
eg: air and water
tragedy of commons
individual producers acts independently according to their individual utilities to use common pool resources → deplete or spoil the common pool resources
arguacultural products
primary products produced from the sea
gov policy on common pool resources
legislation and regulation
collective self-governance
international agreement
tradable permits
carbon tax
public goods
non-rivalrous and non excludable
free rider problem
cost does not increase if more people consume it → consumption of public goods is benficital → will use public gods without paying it → firms do not like to produce public goods
direct provision by government
free for consumers but not for government
government need to use its expenditure to provide the public good
arise political conflict or moral hazard
contracting out the private sector
decrease the size of the bureaucracy of the government
issue contact to private firms to provide the public goods and services
paid by government but the services is run by private firms
Note
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