Government intervention into markets

Question 1

Indirect taxes

Answer 1

Indirect taxes on expenditure. they increase production cost for producers, so producers supply less. This increases market price and demand contracts. they could be use to discourage the production or consumption of demerit goods

Question 2

subsidies

Answer 2

A subsidy is a payment from the government to a producer to lower their cost of production and encourage them to produce more
- Subsidy encourages the consumption of merit goods. this include the full social benefit in the market price of the good. Therefore the external benefit is internalised

Question 3

Max/ min prices

Answer 3

Gov set maximum prices where consumption/ production is to be encouraged So that good does not become too expensive to produce/ consume

Question 4

Max price

Answer 4

They prevent monopolies exploiting consumers
- Maximum price control the market price, but this could lead to gov failure if they misjudged where the optimum market price should be
-Maximum price could lead to welfare fain for consumers by keeping prices low and they could increase efficiency in firms
- However, it could reduce a firm profit. which could lead to less investment in the long run. Moreover, firms might raise the prices of other goods, so consumers might have no net gain.

Question 5

Min price

Answer 5

The government might set a minimum price where the consumption or production of a good is to discouraged. this ensures the good never falls below a certain price
- minimum price would reduce the neg externality from consuming a demerit good