Producer surplus
- usually below equilibrium line
- when a producer receives more for a product or service than the price they’re willing to accept
Consumer surplus
- usually above equilibrium
- when a consumer pays less for a good than the amount that they’re prepared to pay for it
Subsidies
- government provides
- money paid to producer of a good makes it cheaper
- supply increases
Indirect tax
- used by government to reduce demand for it e.g. cigarettes and alcohol
VAT ( type of indirect tax)
- charged as a percentage of the price and is added onto to the initial price
Subsidies pros
Keeps suppliers in business
Low income earners benefit
Investment
Encourages consumption of merit goods(education and healthcare)
Subsidies cons
- politically driven
- not sustainable
- opportunity cost
- leave free market
Asymmetrical information
Usually when sellers have more information than the buyers
Negative externalities
A negative effect on a third party outside the externality
Industry’s which create negative externalities
- the tobacco industry
- the alcohol industry
- the construction industry
- the gambling industry
Positive externalities
- A product which has a positive impact on the third party
- under valued and under consumed
Examples of positive externality industry
- healthcare
- education
- apprenticeships
- the leisure industry( gyms)
Pollution permits pros
Used mainly in heavy Industry
- incentivises firms to use eco-friendly technology as their always having to pay for permits when going over amount allowed
Why do pollution permits often fail to work?
- price per unit might not restrict firms from buying units
- administration costs are expensive
- difficult to measure pollution
