government intervention

Define 3 types of economy

Command: resources are allocated by the government.
Free Market: the price mechanism allocates resources.
Mixed: resources are allocated by a combination of the market and the government.

Define Government Failure

Situation where government intervention in the economy attempts to correct a market failure, which then creates a net welfare loss.

Define Subsidy

Grant from the government to increase production and decrease price.

Define Taxation

A compulsory contribution to state revenue, levied by the government.

Define Indirect Tax

A tax placed on a good or service. Usually involves an intermediary (retailer).

Define Direct Tax

A tax on an individual or organisation. e.g: Income tax.

Define Specific tax

A lump sum that does not change in proportion to value.

Define Ad Valorem Tax

A tax that is a percentage of the value of the good.

Define State Provision

The government intervenes to ensure that the supply of merit and public goods is adequately available.

Define Provision of information

Governments seek to address the problems caused by a lack of information. Ensures that economic units can maximise decisions when producing and consuming goods and services.

Define Regulation

Occurs when government creates rules to ensure effective competition. Can help in reducing the overconsumption of demerit goods.

Define Administrative costs

the expenditure of the government on intervening in markets.

Define Social Norms.

Behaviour considered socially acceptable in a group.

Define the Nudge Theory

Manipulating social norms with positive reinforcement in a non-coercive manner.

Define Heuristics

Best described as rules-of-thumb for decision making. Helps people make quick, satisfactory, but not perfect, choices.

Define Minimum Price

Form of government intervention, where a price floor is usually set above equilibrium price to protect producers.

Define Maximum Price

Form of government intervention, where a price ceiling is usually placed below equilibrium price to protect consumers from monopoly exploitation.