1.4- Government Intervention

What are administrative costs?

costs to the government of implementing, enforcing + monitoring a policy in a market

problems arising from indirect taxes?

if price is inelastic → tax less effective, consumers still purchase good

setting tax at right level → overtax leads to shadow markets

regressive → more inequality

problems arising from subsidies?

setting subsidy at right level → over subsidy = costly

how firms use the subsidy

firms become dependant on subsidies

if demand is inelastic → less effective

Types of government intervention

1. indirect taxes

2. subsidies

3. max price / min price

4. state provision

5. provision of information

6. regulation

define regulation

a rule / law enacted by the government and followed by economic agents to encourage a change in behaviour

problems with regulation

costly to enforce → policing required

setting at right level, if too strict firms close down → unepmloyment

rise in shadow markets→ consumers look for alternative supply

if regulation to lax, firms won’t change

what is a tradeable pollution permit

gives a firm the right to emit a given quantity of waste or pollution into the environment

disadvantages of tradeable pollution permits

enforcement is costly

cap not set at right level

firms might shut down or move to countries with lax rules

need for international cooperation as pollution is a global issue

what is state provision of goods

the direct provision of goods/ services by the government free at the point of consumption

ADD of state provision

• corrects market failure

• improves equity and access

• promotes positive externalities-→ healthier, educated population

DIS of state provision

high opportunity cost

potential inefficiency 

overconsumption

drawbacks of min price

if demand is inelastic → quantity demanded won’t fall enough

regressive → impacts poor more than rich → increasing inequality

rise in shadow markets as individuals fine alternative supply

cap not set at right level → if too low or high demand won’t reach socially optimum level

what is minimum price used for

to discourage consumption of goods with negative externalities

what are maximum prices used for?

encourages consumption of goods with positive externalities

DIS of max prices

shortages

shadow markets → dangerous 

high opportunity cost

setting price cap at right level, too low → excess demand

What is the free ride problem?

Occurs when people benefit from a good or service without paying for it because it is non - excludable

What is a guaranteed minimum price?

a price floor

what is a maximum price?

price ceiling

encourages consumption

what is an indirect tax

placed on goods/services and is paid to the government by producers but can be passed on to the consumers through higher prices