Government Intervention in Pricing

Topics: Welfare economics, Market failure, Externality Pages: 3 (783 words) Published: February 4, 2013
-Higher price --> less supplied and consumed of demerit goods. Increase in consumer welfare. -Government gains revenue.
-Tax receipts can be used to further help with problem e.g. Taxing alcoholic drinks and using the receipts to add funding to the NHS or policing. Disadvantages:
-If demand is very income inelastic (e.g. cigarettes) then consumption would not greatly reduce-> potential for black market. If consumption does remain the same then taxation is just a way for the government to basically, take people’s money. -Leads to inflationary pressure

-Hard to decide the level of taxation as Impossible to work out exact value of negative externalities. -In the case of pollution it is particularly hard as there would have to be an agreement with other countries about what to do with the tax money. (If the UK gov. receives money from pollution permits, should some of this money go to other countries who suffer from the affects of British pollution? -Some taxes simply make things less equitable e.g. Introducing a fat tax would just make it harder for poorer people to afford food.

-prices fall so the demand and consumption of merit goods/positive externalities will increase = increase in economic welfare - can make things more equitable e.g. Subsidising healthy foods would make lower prices for the poorest in society. Disadvantages:

-expensive for the Government (opportunity cost?)
- correct level of subsidy is difficult to gauge - positive externalities are hard to calculate - may encourage inefficiency
- depends on the PED of the product as to the effectiveness
- Stable prices help maintain producers incomes
- Stable prices prevent excess prices for consumers
- Food supplies are assured

In agriculture more likely the government will have to buy than sell- very costly to government as extra supply will have to be...
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