Please enable JavaScript.
Coggle requires JavaScript to display documents.
micro paper 2 - Coggle Diagram
micro paper 2
government intervention in markets to protect consumers
non-price policies
trade pollution permit
permits issued by the government allowing firms to produce a certain amount of pollution
firms are taxed if they exceed their allowed pollution
firms can sell their permits if they don't pollute for extra revenue
advantages and disadvantages
advantages
they are an incentive to reduce pollution (selling unused permits )
these schemes work though the market mechanism (supply and demand )
the costs of administering these schemes are low relative to other systems of regulation
disadvantages
pollution will continue even though its a lower level (it may be cheaper to buy more permits than to reduce pollution )
large efficient firms might buy up the permis and continue to pollute
state provision of public goods
goods that are usually financed through taxation
goods such as street lights or parks
advantages and disadvantages
advantages
the good is provided for public benfit
disadvantages
politicians are the ones who decide what resources are allocated to these goods without input from the public
the government may also contract an external agency or volunteer group to provide the public goods
provision of information
information gaps can be closed by providing people with information in the media
examples may be information on how to slow the spread of coronavirus, or health warning about smoking
can have high costs associated whlst having no gaurentee of being effective
can also be the provision of education especially further levels of education
regulation
legal restriction imposed on the consumer and/ or the producer
examples may be restricted movement during a pandemic, or a ban on smoking in the work place and other areas
the effectiveness of a regulation depends on how well it is enforced
advantages and disadvantages
disadvantages
depending on the activity there can be high costs of enforcing the laws/regulations (less effective when less enforced )
probelms determining the socially optimal levels of the production process or activity
advantages
regulation can limit the extent of the activity
it might act as an incentive to producer to develop new technologies that avoid the activity
property rights
giving ownership/property rights to those affected by external costs meaning owners can claim damages/ money form those causing the external costs
advantages and disadvantages
advantages
acts as an incentive for firms to take into account both the private and external costs
the opportunity to fine firms caught polluting and use the money to compensate those damaged
administration costs of these schemes are relatively low compared to other forms of regulation
disadvantages
there is an initial problem of assigning property rights
if a breach of property rights happens there may be an expensive legal procedure to decide how much compensation should be paid and to whom
it may be difficult to decide on the monetary value of external costs
managing prices
indirect taxes
the aim of using an indirect tax is to internalise the externality
shifts supply left
negative production externality
a negative side effect of activities of firms where the firm doesn't pay the full cost of the activities
one example is pollution
advantages and disadvantages
disadvantages
ineffective in reducing pollution if demand in price inelastic
difficulty in setting an appropriate tax because of the problem of quantifying the external cost
advantages
source of revenue for the government and few costs administering this method
incentive to reduce pollution
subsidies
advantages and disadvantages
disadvantages
ineffective in increasing consumption if demand is price inelastic
cost to the taxpayer of providing subsidies
difficulty in setting an appropriate subsidy because of the problem of quantifying the external benefit
advantages
incentive for people to increase consumption
reduction in cost of production enabling suppliers to reduce the price
when the government gives grants to lower the production costs so the product or service can be provided at a lower price
maximum price
used to limit firms ability to set high prices in different contexts
advantages and disadvantages
disadvantages
producers may exit the market in order to use their resources to produce goods taht are more profitable
there is a danger that shortages mean some consumers are unable to find supplies of the product
a black market could develop with the product being sold illegally for higher prices
if the government subsidises producers to encourage them to maintain output, then there will be significant cost to the taxpayer
advantages
help prevent an increase in the rate of inflation
enable consumers on low incomes to be able to afford the product
minimum price
can be used in different ways, for example a minimum wage or a minimum guaranteed price (MGP) for commodities
advantages and disadvantages
disadvantages
these schemes can involve storage costs which taxpayers will have to pay
the schemes encourage over production and may therefore result in inefficient allocation of resources
if the MGP is too high, then there will be surpluses every year
advantages
the greater certainty enables producers to plan investment and output
producers know in advance the price they will receive for their product
government intervention is intended to correct market failure
costs revenues and profits
profits
oligopoly
monopoly
monopolistic competition
normal and supernormal profit
supernormal profit
anything above normal profit
normal profit
takes into account all revenues and costs but also opportunity cost
costs
monopolistic competition
monopoly
oligopoly
the economic cost of production for a firm is the oppertunity cost
oppertunity cost is the value that could have been generated had the reasroces been used for the next best option
F, V, and SV costs
F (fixed costs)
a costs which the firm must pay but doesn't change when increasing or decreasing output
V (variable costs)
A cost that varies with output
SV (semi-variable costs)
a cost that typically has an initial fixed cost that must be paid no matter the output and can then increase when increasing output
T, A and M costs
M (margianl costs)
the cost of producing an extra item of output
A (avarage costs )
total costs divided by output
T (total costs)
cost of producing a certain amount of output. increasing production will increase total costs
SR, LR and VLR
LR (long run )
all factors inputs are variable
VLR (very long run )
state of technology changes
SR (short run)
some factors of production are fixed
a firm could purchase raw materials but not increase the size of their factory's
revenue = income generated from the sales of goods or services
monopoly
monopolistic competition
oligopoly
the revenue earned depends on the willingness of consumers to buy the product at any given price and therefore relates to demand
different types of revenue
average revenue (AR)
the total revenue divided by the quantity sold
margianl revenue (MR)
the aditional revenue of selling one extra unit of the good or service
positive and normative statements
normative statements
subjective statements
they carry value judgements about what ought to be right
value judgements influence gov policies and can differ from person to person
positive statements
objective statements
can be tested, amended or rejected by referring to available evidence
positive economics
objective explanation and the testing and rejection of theories
false statements are also positive
consumer behaviour
why people don't switch between products