Microeconomics PT3

Question 1

where is the tax per unit?

Answer 1

difference between supply curves

Question 2

subsidy

Answer 2

government expenditure to a firm to encourage lower costs of a good or service

Question 3

how does a subsidy work

Answer 3

lowers costs of production, lowing price and increasing quantity, changing consumer behaviour

Question 4

how does a subsidy solve market failure

Answer 4

A subsidy shifts the supply curve to the right and can be justified for goods which offer benefits to the rest of society.

Question 5

limitations of subsidy

Answer 5

inelastic PED, inefficiency in use of subsidy, negative YED

Question 6

evaluation of subsidy

Answer 6

size, PED, used with other policy, time period, substitutes, expense

Question 7

benefits of subsidy

Answer 7

increases production of goods with positive externalities,

Question 8

benefits of taxation

Answer 8

changes consumer behaviour towards positive externality goods, revenue from taxation can further counteract negative externalities

Question 9

problems of subsidies

Answer 9

1. costs met through taxation
2. unintended consequences
3. difficult to estimate

Question 10

subsidy incidence

Answer 10

indicates how the benefit of the subsidy is shared by market participants

Question 11

how to find producer incidence of subsidy

Answer 11

old supply curve to new equilibrium and up

Question 12

how does PED affect consumer and producer subsidy incidence

Answer 12

when elastic benefits producers more, when inelastic benefits consumers more

Question 13

minimum price

Answer 13

set above equilibrium price

Question 14

why is a minimum price used

Answer 14

tackles negative externalities to contract demand, tackles demerit goods, reduces volatile prices, reduces poverty and inequality

Question 15

how does a minimum price work

Answer 15

forces price up into disequilibrium, contraction in demand and expansion in supply

Question 16

how does minimum price differ with PED

Answer 16

inelastic - small excess supply and small contraction in demand
elastic- large excess supply and large contraction in consumption

Question 17

advantages of minimum price

Answer 17

reduces consumption and therefore reduces welfare loss when targeting negative externalities
producers can take risks and plan investment as they have a guaranteed price

Alcohol:
- Can cut premature deaths, increase productivity, lessens NHS burden
- Can target cheaper, high strength drinks used by younger drinkers.

Question 18

disadvantages of minimum price

Answer 18

regressive and inequitable, could raise taxes if combating negative externalities, PED, unintended consequences, incomes may be rising, substitute switch

Question 19

maximum price and diagram

Answer 19

A maximum price means firms are not allowed to set prices above a certain level. The aim is to reduce prices below the market equilibrium price.

draw diagram

Question 20

when could maximum price be used

Answer 20

Maximum prices may be most useful in the case of a monopoly who is both restricting supply and inflating prices.

encourage consumption of merit goods, ones which suffer from information failure or promotes factor mobility, target monopoly firms, improves basic living standards

Question 21

how does a maximum price work

Answer 21

lowers price, excess demand, contraction in supply

Question 22

advantages of maximum price

Answer 22

1. The advantage is that they will lead to lower prices for consumers.
2. This may be important if the supplier has monopoly power to exploit consumers. For example, a landlord who owns all the property in an area can charge excessive prices.
3. Maximum prices are a method to bring prices closer to a ‘fair’ and ‘competitive equilibrium.
   Maximum prices are usually reserved for socially important goods, such as food and renting.

Question 23

disadvantages of maximum price

Answer 23

create shortages, creating competition and waiting lists, consumers may find alternative supplies, maximum price lowers profits of producers lowering investment, if it is not being enforced then producers overprice

Question 24

evaluation of maximum prices

Answer 24

government could exclude those who can clearly afford the good, set max price, PED/PES, other policy measures, affect on producer and consumer surplus

Question 25

issues with price volatility

Answer 25

creates uncertainty, increases risk, lowers investment

Question 26

cause of price volatility

Answer 26

inelastic PED and PES

Question 27

buffer stocks and draw the diagram

Answer 27

stabilises the price of a commodity by buying excess supply and selling when supply is low

Question 28

advantages of buffer stocks

Answer 28

fairness,
farmers have not been pushed into poverty and consumers’ welfare has increases,
stable prices maintain incomes increasing incentive for legal crops to be grown,
enables capital investment for productivity,
positive externalities sustaining rural communities, the government can gain revenue

Question 29

disadvantages of buffer stocks

Answer 29

cost of buying excess supply are high if there are a series of good harvests, guaranteed Pmin might cause over-production and surpluses causing economic and environmental costs, requires start-up capital, stock may be perishable, high administrative and storage costs, may encourage inefficiency

Question 30

evaluate buffer stocks

Answer 30

how easy good perishes, series of good/bad harvests, cost of maintaining the scheme, excess supply may be dumped on other countries, international approach may be beneficial

Question 31

addressing information failure

Answer 31

information provision through health warnings, industry standards, consumer protection laws, advertising campaigns, performance league tables

Question 32

evaluating information provision

Answer 32

targeting, consistent, addressing the cause of the problem, cost of provision, nanny state, use with other policies

Question 33

legislation

Answer 33

prevent the supply of a good through making and enacting laws

Question 34

regulation

Answer 34

government intervention in a market to change the production of a good, limiting or encouraging the supply

Question 35

how can regulation affect production costs

Answer 35

increase in COP reduces quantity traded and moves towards Qso, reducing market failure

Question 36

advantages of regulation

Answer 36

quickly introduced with fines to generate revenue, simple to understand and quicker than tax, fairer than taxes, still effective if demand is inelastic/elastic

Question 37

disadvantages of regulation

Answer 37

costly to introduce and danger of non-compliance, firms pass on costs to consumers, taxes better way of collecting government revenue, depends on the cause of market failure, prohibition encourages underground economy, excessive regulation leads to firm relocation

Question 38

regulatory capture

Answer 38

the regulator acts in the interest of the producer than the consumer, leads to high prices, low consumer welfare and low restrictions

Question 39

why does regulatory capture occur

Answer 39

lack of regulatory resources, existence of asymmetric information, regulators work closely with firms

Question 40

private finance initiative

Answer 40

finance and investment by private firms into the public sector, which is then sold to the public sector

Question 41

advantages of PFIs

Answer 41

introduces competitive element, firms are profit driven and leads to efficiency, upfront costs are paid by the private sector meaning the government can expand infrastructure with low short term costs, which are later paid for by economic growth, dynamic efficiency, private sector is more innovate and have more expertise so produce more quality

Question 42

disadvantages of PFIs

Answer 42

private sector has less incentive to pay attention to health and safety issues or quality, poor value for money with high charge as the cost of provision is higher than would be if had been state-funded, risk of failure and collapse, debt costs

Question 43

how do PFIs (private finance initiative) work?

Answer 43

contracting out where activities are fully placed with the private sector, competitive tendering through bidding for contracts, public-private partnerships

Question 44

reasons for government provision

Answer 44

equality, public goods, education, shift consumer behaviour, environment, monopoly power, infrastructure

Question 45

equality government provision

Answer 45

in a free market there will be inequality and poverty and to correct unfair advantages governments can intervene to provide a base level of equality of opportunity through education and a protection against poverty through benefits and a minimum wage to increase net economic welfare, also prevents unrest

Question 46

education government provision

Answer 46

merit good is underprovided by the free market leading to improvements in quality of life as better skilled workers can earn higher incomes and create positive externalities, in the long run improves productivity and economic growth

Question 47

shift consumer behaviour

Answer 47

reduces consumption of demerit goods causing private and external costs. consumer behaviour can be changed through tax etc to reduce government spending on areas such as police and healthcare

Question 48

disadvantages of government intervention

Answer 48

government failure, lack of incentives, political pressure groups, less choice, impact on personal freedoms

Question 49

government failure government provision

Answer 49

can further cause welfare loss through imperfect information or short term political considerations which causes more harm than good

Question 50

lack of incentives government provision

Answer 50

without price mechanism, individuals do not have profit motive, leads to inefficiency and slows in economic growth as productivity does not increase, state ownership reduces choice

Question 51

competition policy

Answer 51

regulation to promote competition and prevent consumers from being exploited by firms with large market power

Question 52

functions of the competition and markets authority

Answer 52

investigating mergers, assessing markets where there is a lack of competition, anticompetitive agreements, cartels, consumer protection

Question 53

failures of the CMA

Answer 53

there may be information failure, there may not be anything wrong with a market, instead simply the way the consumers understood the workings