Gov intervention/market failure definitons

Price controls

limits imposed by the gov. on how low or high price can be , preventing prices from reaching equalibrium, forcing disequalibrium

Indirect taxes

Payments made to government which are partly paid by consumers but are paid to the government by producers

2 types of indirect taxes - Excise and VAT

Excise tax - Placed on specific goods/services, e.g alcohol
VAT (value added tax) - Added on spending of most goods/services. VAT in Austria 20%

Specific (indirect tax)

Per unit amount added to a good/service

Producer subsidy

A payment from theh government to producers whihc are generally a fixed (sepcific) amount of per-unit of output

Market failure

faiulre of the market to allocate resources efficiently. Market failure results in allocative inefficiency, where too much or too little of a good or service are produced or consumed from the view of soceity.

Externality

When the actions of producers or consumers give rise to negative ir positive side effects on those not involved in that action

PRO. MPC

costs to producers for producing one more unit of good

PRO. MSC

costs to soceity for producing one more unit of a good

CON. MPB

the benefits to consumers for consuming one more unit of a good

CON. MSB

the benefits to soceity for consuming one more unit of a good

MSB=MSC

Allocative effeciency - resources are allocated in a way that DOES NOT create externalities, creating the perfect amount (Qopt)

Negative externalities of PRO.

the external costs created by producers (overallocation of resources always)

Internalization

the stakeholder is now paying the EXTERNAL COST (the effects)

Tradable permits

a market based polic in whihc a gov. body sets an amount of permits that can be bought and sold by polluters

Negative externalities of CON.

the external costs created by consumers

Demerit good

goods that have harmful effects on the consumer and create spillover costs for soceity.

All demerit goods create NEC but not all NEC are demerit goods.

Merit goods

goods/services that are beneficial for consumers and create positive spillover effects for soceity.

Positive externalities of PRO.

the external benefits created by producers

Positive externalities of CON.

external benefits created by consumers

Common pool resources

natural resources that are not owned by anyone and their overuse can lead to depletion and degredation

Public goods

Needs to be non rivalrous and non excludable

Non rivalrous

The consumption by one person does not reduce the consumption by someone else

Non excludable

its not ppossiblt to exclude someone from using the good.

Direct/government provision

the govenrment making/fully funding public goods

Contracting out

govenrment allowing private firms to carry out an activity they have done themselves. Paid by public funds.

Asymmetric information

buyers and sellers do not have equal access to information

Types of asymm. info:

Adverse selection - one party in transaction has more info about quality of the product being sold than the other party.

Moral hazard - one party takes risks but does not face the full costs of them becaus ethe full costs of them are borne by the other party.