AS 9708 » Section 3
3.1 Reasons for government intervention in markets
- Addressing the non-provision of public goods
3.1.1 - Addressing the over-consumption of demerit goods and the under-consumption of merit goods
3.1.2 - Controlling prices in markets
3.1.3
3.2 Methods and effects of government intervention in markets
3.2.1 impact and incidence of specific indirect taxes
definition
Direct tax — tax on income and wealth.
Indirect tax — tax on expenditure.
Specific tax — tax of a fixed amount per unit purchased.
Ad valorem tax — tax of a proportion or percentage of the price charged by the retailer.
Impact of tax — initial burden of tax.
Incidence of tax — ultimate burden of tax.
note
The more relatively inelastic side of the market will pay a bigger share of a tax (tax burden).
Limitations of tax
- May not be effective on inelastic demand
- Has negative redistribution effects as a regressive tax
- Tax value can be difficult to determine
- Cost of collection introduces opportunity cost
- Increased costs of production which may link to macroeconomics
3.2.2 impact and incidence of subsidies
definition
Subsidy — a payment by the government to suppliers that reduce their costs of production and encourages them to increase output of a G/S.
Reasons for subsidies
- Correct market failures for essential G&S
- For equality in terms of equitable distribution of income and rising producers' income
- For competitive trade in terms of exporters and reducing dependence on imports
Limitations of subsidies
- May not be effective on inelastic demand
- Financial cost, or opportunity cost
- May encourage inefficiency
- Risk of fraud or corruption
3.2.3 direct provision of goods and services
definition
Direct provision — when the government decides to provides goods and services itself.
Benefits for direct provision
- Resource allocation improves and reduces market failures (public good)
- All social benefits considered, and G&S will be provided at an amount closer to optimum (merit good)
- Good for equality
Limitations of direct provision
- There is opportunity cost involved
- May be funded by a higher tax burden
- State-run organizations tend to be wasteful and inefficient, and lack innovation
- Private sector might be ignored that could complement the public services
- Storage or surplus can be created due to a lack of price signal
3.2.4 maximum and minimum prices
definition
Maximum price — a price ceiling set below the equilibrium price so that the market price cannot go above it.
Minimum price — a price floor set above the equilibrium price so that the market price cannot go below it.
3.2.5 buffer stock schemes
definition
Buffer stock scheme — a government plan to stabilize prices in volatile markets. This requires intervention in buying and selling.
Benefits for buffer stock schemes
- Stable prices to prevent structural unemployment
- More investment in the sector
- Encouraging positive externalities
- Reduce inflation
- Maintain good supply
- Government could make a profit
Limitations of buffer stock schemes
- There is opportunity cost involved
- May encourage oversupply and inefficiency
- Some goods cannot be stored
- Difficult to determine the amount
3.2.6 Provision of information
definition
Information failure — a type of market failure where individuals or firms have a lack of information about economic decisions.
Provision of information — government-funded information provision, advertising and education to encourage or discourage consumption.
Benefits for information provision
- Demand for demerit goods will decrease and vice versa.
- More market-friendly
- Healthier labor force so higher productivity.
Limitations of information provision
- There is opportunity cost involved
- May take a long time
- Depends on price elasticity of demand
- Depends on target audience
- Depends on ease of understanding
3.3 Addressing income and wealth inequality
3.3.1 difference between income as a flow concept and wealth as a stock concept
definition
Wealth — a stock of assets that have ben built up often over a long time period.
Income — a flow of payment to FoPs over a given time period.
3.3.2 measuring income and wealth inequality
definition
Gini coefficient — a numerical measure of the extent of income inequality in an economy.
Gini coefficient is used as the measure of income and wealth inequality.
3.3.3 economic reasons for inequality of income and wealth
- Lack of formal employment opportunities
- Poor vocational training
- Poor infrastructure
- Inability to obtain credit
3.3.4 policies to reditribute income and wealth
definition
Minimum wage — a legal requirement of what employers must pay on employee per hour.
Advantages for minimum wage
- Equity
- Poverty reduction
- Incentive to work
Disadvantages of minimum wage
- Unemployment caused by high labor costs
- International competitiveness falls
- May cause inflation
- Affects small business
definition
Transfer payments — payments made by one person or a group to another but not in return for a G/S.
Advantages for transfer payments
- Social safety net for poor households to provide basic standard of living
- Equity
- Reduction in crime rates
- Avoid generational poverty
Disadvantages of transfer payments
- Reduce incentive to work
- Opportunity cost for government
- Can lead to poverty trap
definition
Progressive taxation — a tax system that takes a higher proportion of income from the rich than the poor.
Regressive taxation — a tax system that takes a higher proportion of income from the poor than the rich.
Proportional taxation — a tax system that takes an equal proportion of income from all income earners.
For state provision of essential goods and services, see 3.2.3 and combine with transfer payments.