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Government microeconomic intervention - Coggle Diagram
Government microeconomic intervention
Reasons for government intervention
Market failure
Overconsumption of demerit goods
Cause
These goods are overprovided in the market
Consumers lack full and proper information
Excamples
Fast food
Tobacco
Cigarettes
Solution
Manufacturers may be required to put written warning and graphic photographs on packaging explaining the dangers of smoking.
Government insentive
Health and well being of the population
A more productive work force
Saving in the healthcare budget
Information failure
Underproduction of merit goods
Examples
Healthcare
Secondary education
Cause
Access is restricted to those who can pay
Information failure on the part of the consumers
Lack of public goods
Examples
National defence
Street lights
Police force
Non-toll roads
Cause
Nature
Constantly available to the public
Free rider problem
Collectively consumed
It is hard to make a direct charge for consumption of the good
Controlling price in markets
Maximum prices
Rent controls
Minimum prices - to support farmers incomes
Methods and effects of government intervention into markets
Indirect taxes
Ad valorem
Percentage of the price charged by the retailer
e.g. VAT
Specific taxes
Fixed amount per unit purchased
Based on a measurable quantity
Included in the final price
Discourage the consumption of demerit goods
Incidence
The extent to which the tax burden is borne by the consumer or the producer
If demand is elastic it will be on the producer
If supply is price elastic it will be on the consumer
Subsidies
Reasons
Raise incomes of producers (farmers)
Help exporters to sell more
Provide services not provided by the free market
Reduce dependence on imports
More equitable income distribution
Encourage production and consumption of merit goods
Keep market prices of necessities down
Opposite effect to an indirect tax
Allocated out of tax revenue, competing against other demands for funding
Incidence on producers or consumers who are the most price elastic
Direct provision of goods and services
Merit goods
Public goods
Issues
Lack of efficient resource allocation
Some consumers could afford to pay a charge
Buffer stock schemes
Minimum prices
Wages in certain occupations
Agricultural products
Imported goods
Demerit good
Maximum prices
Staple food items
Petrol and diesel fuel
Rents for certain housing
Services provided by utilities
Transport fares
Type of commodity agreement designed to limit price fluctuations
Provision of information
Compulsory - cigarette packaging
Public health announcements and campaigns
Advice on non-prescription medicines
Nutrition and allergy information on food packaging
Addressing income and wealth inequality
Income
Reward for labour - flow concept
Wealth
A stock of assets that has been built up over time
Redistribution policies
Minimum wage rate
Transfer payments
Progressive taxes on income, inheritance and capital
State provision of essential goods and services
Measuring methods
Gini coefficient
A numerical measure of income inequality
0 = income distribution is equal
1 = all income accrues to one person
Reasons
Lack of investment into education and health
Poor vocational training
Poor infastructure
Lack of formal employment
Low rate of savings
Inability of obtaining credit for many people