GOVERNMENT INTERVENTION

Question 1

AD VALOREM TAX

Answer 1

These are charged on a proportion of the price of the good

Question 2

SPECIFIC TAXES

Answer 2

These are fixed amounts that are charged per unit of a particular good

Question 3

TAX PRODUCTS WITH NEGATIVE EXTERNALITIES

Answer 3

The government put indirect taxes on products that have negative externalities. For example, cigarettes have two indirect taxes, ad valorem and specific

Question 4

ADVANTAGES OF INDIRECT TAX

Answer 4

~Demand will drop allowing for the effect of negative externalities to fall
~ If Demand doesn’t drop as they usually tax products that are inelastic, they will gain more money from tax

Question 5

DISADVANTAGES OF INDIRECT TAXES

Answer 5

~Demand doesn’t drop because of products being inelastic
~Increases the cost of production, reduces competitiveness
~Firms may relocate to avoid the tax, UK doesn’t benefit from the taxes

Question 6

ADVANTAGES OF SUBSIDIES

Answer 6

~Positive externalities still present
~Can support firms to a point where they benefit off of EOS
~Subsidies can change preferences- Firms start to produce products with positive externalities and consumers benefit off of this also. Making a merit good cheaper makes it more affordable and increases demand

Question 7

DISADVANTAGES OF SUBSIDIES

Answer 7

~The effectiveness of the subsidy depends on the elasticity of the product
~Opportunity cost
~Can make firms less productive and reliant on subsidies
~May be difficult to put monetary value on the benefit of the positive externality

Question 8

MAXIMUM PRICES

Answer 8

~The government usually set a maximum price on a good/service to increase consumption by making it more affordable.
~If it is set above the market equilibrium price it will have no effect
~If set below it will cause excess demand, meaning a shortage in supply

Question 9

MINIMUM PRICES

Answer 9

~They are set to make fair prices for suppliers
~They are a good way to restrict monopsony power
~Provides a guaranteed price for suppliers

Question 10

ADVANTAGES OF MAXIMUM PRICES

Answer 10

~Increases competitiveness
~Increased fairness
~Prevent monopolies exploiting customers

Question 11

DISADVANTAGES OF MAXIMUM PRICES

Answer 11

~Excess demand
~May need to introduce rationing schemes
~

Question 12

ADVANTAGES OF MINIMUM PRICES

Answer 12

~Producers have a guaranteed income
~Stockpiles can be used when supply is reduced

Question 13

DISADVANTAGES OF MINIMUM PRICES

Answer 13

~Consumers will be paying a higher price
~Excess supply, allocatively inefficient

Question 14

STATE PROVISION

Answer 14

This is when governments directly provide some goods and services.
~They use tax revenue to pay for it. For example, the UK provide the NHS

Question 15

DISADVANTAGES OF STATE PROVISION

Answer 15

~Less incentive to operate efficiently
~May fail to respond to consumer demands, due to no motivation of profits
~Opportunity cost

Question 16

VARIATIONS OF GOVERNMENT INTERVENTION

Answer 16

~Reducing the use of demerit goods and services
~Reducing the power of monopolies
~Providing protection for customers and producers from problems arising from asymmetric information

Question 17

DEREGULATION

Answer 17

Removing regulations

Question 18

ADVANTAGES OF DEREGULATION

Answer 18

~Improves efficiency by removing ‘red tape’.
~Improved allocation of resources

Question 19

DISADVANTAGES OF DEREGULATION

Answer 19

~Difficult to deregulate natural monopolies
~Can’t fix other market failures eg. negative externalities
~Less safety and protection for the consumers

Question 20

THE CMA

Answer 20

Monitor markets to look out for unfair monopolistic behaviour

Question 21

THE CMA CAN DO…

Answer 21

~Block mergers
~Look out for collusive behaviour
~Can impose fines on firms that show anti-competitive behaviour