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ECONOMICS THEME 1 - TOPIC 1.4 - GOVERNMENT INTERVENTION - Coggle Diagram
ECONOMICS THEME 1 - TOPIC 1.4 - GOVERNMENT INTERVENTION
indirect taxation
when a good has a negative externality, the government can introduce an indirect taxation to cause a fall in supply and increase costs to the individual
advantages
maximises social welfare
raises government revenue
disadvantages
inelastic goods have no impact
politically unpopular
black market use
regressive (also impact the poor)
difficult to target the tax and effect can be limited
government failure
is when government intervention leads to net welfare loss and a misallocation of resources
causes of government failure...
unintended consequences
e.g targets for treating patients on the NHS led to a reduction in quality of care
distortion of price signals
they keep some companies in business when they're inefficient and so resources should be used elsewhere
max and min prices lead to excess demand/supply
the price mechanism is distorted by intervention so resources may be allocated ineffficiently
excessive administration costs
this may cause social costs to be higher than social benefits
e.g lots of money given to NHS but lots of that is spent on organisational administration rather than medical care
information gaps
subsidies
will shift the supply curve to the right by lowering the cost of production
advantages
welfare is maximised
they have other positive impacts e.g encourage business growth
disadvantages
can make producers inefficient
difficult to target
high opportunity cost
state provision of public goods
disadvantages
expensive so high opportunity cost
government may provide the wrong goods, however, voting and democracy limits this issue
government corruption and conflicting objectives
advantages
corrects market failure
bring about equality
brings about other positive externalities
maximum and minimum prices
for a max price to have an effect it must be below the current price equilibrium
for a min price to have an effect it must be above the current equilibrium
a maximum price is a legally imposed price that suppliers can't charge above
they're set on goods with positive externalities
a minimum price is a legally imposed price at which the price of the good cannot go below
set on goods with negative externalities to discourage consumption
advantages
both reduce inequality and reduce povery
reduces negative externalities being overconsumed
disadvantages
causes excess supply/demand
difficult to know where to set the prices
creation of black markets
provision of information
when there is asymmetric information, the government provides information to allow people to make informed decisions
advantages
helps consumers act rationally
works alongside other policies
disadvantages
government may not have info
consumers may not listen
can be expensive (opportunity cost)
regulation
advantages
prevent market failure and maximise social welfare
disadvantages
firms may pass costs on to customer
excessive regulation may reduce competition and therefore reduces innovation
laws may be expensive to monitor
tradable pollution permits
limits the maximum amount of pollution
creates a market from it and makes an incentive to be environmentallt friendly
disadvantages
can be expensive to monitor and police
will raise costs for business and potentially consumers
may be difficult to know how many permits governments should allow
advantages
guaranteed fall in pollution
can raise government revenue by selling permits
encourages firms efficiency too