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Why are indirect taxes introduced
To address negative externalities and prevent market failure
How do indirect taxes affect the supply curve
They shift the supply curve to the left, increasing costs and reducing output
What is an advantage of indirect taxes
They internalize the externality, moving production to the social optimum
What is a disadvantage of indirect taxes
They are regressive and may disproportionately impact the poor
Name examples of indirect taxes in the UK
Landfill tax, fuel duty, alcohol duty, tobacco duty, and sugar tax
Why are subsidies introduced
To address positive externalities and reduce costs of production
How do subsidies affect the supply curve
They shift the supply curve to the right, reducing price and increasing output
What is an advantage of subsidies
They maximize social welfare by achieving the social optimum output
What is a disadvantage of subsidies
They have high opportunity costs and can make producers inefficient
Name examples of subsidies in the UK
Subsidies for biofuels, solar panels, wind farms, and railways
What is a maximum price
A legally imposed price that suppliers cannot exceed, set below equilibrium
What is a minimum price
A legally imposed price that goods cannot fall below, set above equilibrium
What is an advantage of maximum prices
They ensure affordability for essential goods, such as food or rent
What is a disadvantage of maximum prices
They create excess demand, leading to shortages and black markets
What is an advantage of minimum prices
They ensure producers receive a fair price, discouraging overconsumption
What is a disadvantage of minimum prices
They create excess supply, leading to surpluses and resource wastage
What are tradable pollution permits
Permits allowing firms to emit a limited amount of pollution, which can be traded
What is an advantage of tradable pollution permits
They guarantee a reduction in pollution to the government’s set limit
What is a disadvantage of tradable pollution permits
They are expensive to monitor and enforce effectively
Name an example of a successful pollution permit scheme
The US Sulphur Trading Scheme reduced sulphur dioxide emissions by 40%
Why does the government provide public goods
To address market failure due to the free rider problem
What is an advantage of state provision
It improves equality and ensures access to essential services
What is a disadvantage of state provision
It can be inefficient and lead to resource misallocation
Why does the government provide information
To reduce information gaps and help consumers make rational decisions
What is an example of government
provided information
What is a disadvantage of information provision
It can be expensive and may not be effective if consumers ignore it
What is regulation
Laws and caps to correct market failure and ensure fair practices
What is an advantage of regulation
It can prevent exploitation and ensure firms consider externalities
What is a disadvantage of regulation
It can be expensive to monitor and enforce, with high opportunity costs
Name examples of regulations in the UK
EU fishing quotas, smoking bans, and vehicle CO2 emission caps
What is government failure
When government intervention in the market leads to a net welfare loss and a misallocation of resources
What causes government failure
When the total social costs of intervention exceed the social benefits
How does government intervention distort price signals
By altering the free market mechanism, leading to inefficient resource allocation
What is an example of distorted price signals caused by subsidies
Subsidies keep inefficient farmers in business, preventing resources from moving to better uses
What is the effect of maximum and minimum prices on resource allocation
They lead to excess demand or supply, disrupting the price mechanism
What are unintended consequences in government intervention
Outcomes that were not anticipated, causing the policy to fail in achieving its goals
Give an example of unintended consequences in the EU agricultural policy
The EU Common Agricultural Policy led to overproduction and price dumping in other markets
How did NHS targets lead to unintended consequences
Focus on targets reduced the quality of care, contrary to the government’s intent
What is an issue with excessive administration costs
A significant portion of funds is used for administration rather than achieving the policy’s goals
Give an example of excessive administration costs in the UK
NHS funds are often spent on organizational administration rather than medical care
Why do information gaps lead to government failure
The government may make decisions based on incomplete or inaccurate data
Give an example of how information gaps cause welfare loss
Inaccurate forecasts of infrastructure use can result in projects where costs outweigh benefits
How do subsidies for farmers illustrate government failure
They support inefficient producers, leading to wasted resources
How did the EU Common Agricultural Policy contribute to government failure
Overproduction led to environmental damage and global market distortions
What is regulatory capture
When regulatory agencies prioritize the interests of industries they regulate over the public
How do price controls cause government failure
Maximum prices create shortages, while minimum prices create surpluses.
