1.4 Gov Intervention

Question 1

What is indirect taxation used for in markets with negative externalities?

Answer 1

To prevent market failure by increasing costs to the individual and shifting the supply curve.

Question 2

What happens to the equilibrium position after the introduction of an indirect tax?

Answer 2

The equilibrium position shifts to where MPB=MSB at P2Q2.

Question 3

What are two advantages of indirect taxation?

Answer 3

• Internalises the externality
• Raises government revenue

Question 4

What is a disadvantage of indirect taxation related to government information?

Answer 4

Difficult to know the size of the externality, leading to imperfect information when setting the tax.

Question 5

What are some examples of indirect taxes in the UK?

Answer 5

• Landfill taxes
• Fuel duties
• Alcohol duties
• Tobacco duties
• Air passenger duties
• Sugar taxes

Question 6

What is the purpose of subsidies in the context of positive externalities?

Answer 6

To shift the supply curve to the right and lower the cost of production.

Question 7

What is one advantage of subsidies?

Answer 7

Society reaches the social optimum output and welfare is maximised.

Question 8

What is a significant disadvantage of subsidies?

Answer 8

They require significant government spending, which has a high opportunity cost.

Question 9

What is a maximum price?

Answer 9

A legally imposed price for a good that cannot be exceeded by suppliers.

Question 10

What is the effect of a minimum price set above the current price equilibrium?

Answer 10

It leads to excess supply of goods.

Question 11

What are the advantages of setting maximum and minimum prices?

Answer 11

• Consideration of externalities
• Ensures affordability and fair prices

Question 12

What is a disadvantage of maximum and minimum prices?

Answer 12

They distort price signals, leading to excess supply or demand.

Question 13

What do tradable pollution permits allow companies to do?

Answer 13

Pollute up to a specific amount and trade unused permits.

Question 14

What is the primary advantage of tradable pollution permits?

Answer 14

Guaranteed reduction in pollution to government-set targets.

Question 15

What is a disadvantage of tradable pollution permits?

Answer 15

Monitoring and policing can be expensive.

Question 16

What characterizes public goods?

Answer 16

Non-excludable and non-rivalry.

Question 17

What is one advantage of state provision of public goods?

Answer 17

Corrects market failure by providing essential goods.

Question 18

What is a disadvantage of government provision of goods?

Answer 18

May result in inefficiencies as the market is not involved.

Question 19

What is the purpose of government regulation?

Answer 19

To ensure companies do not exploit customers and to maintain market integrity.

Question 20

What is government failure?

Answer 20

When government intervention leads to net welfare loss and misallocation of resources.

Question 21

What can cause distortion of price signals in government intervention?

Answer 21

Subsidies and price controls can keep inefficient companies in business.

Question 22

What are unintended consequences of government policies?

Answer 22

Effects that occur but were not intended by the government.

Question 23

What is an example of excessive administration costs?

Answer 23

High costs incurred on organizational administration rather than effective service delivery.

Question 24

What do information gaps in government decision-making lead to?

Answer 24

Limited data can result in poor policy decisions.

Question 25

What may be higher than social benefits once administration costs are taken into account?

Answer 25

Social costs ## Footnote This highlights the potential inefficiency in resource allocation when administrative expenses are factored in.

Question 26

Where is a significant portion of the money given to the NHS spent?

Answer 26

Organisational administration ## Footnote This indicates that funds intended for medical care are often diverted to administrative tasks.

Question 27

What has excessive administration on the Apprenticeship Levy resulted in?

Answer 27

Little money being spent by firms ## Footnote The Apprenticeship Levy aims to enhance apprenticeship quality and quantity but is hindered by administrative burdens.

Question 28

What must any government decision be based on?

Answer 28

Some data ## Footnote However, the information available is often limited and incomplete.

Question 29

Can the government accurately predict the number of cancer patients or cars on the road?

Answer 29

No ## Footnote This illustrates the challenges in making informed decisions due to information gaps.

Question 30

What is often wrong in cost and benefit forecasts of investment?

Answer 30

They are often wrong ## Footnote This leads to situations where the government invests in systems yielding higher costs than benefits.

Question 31

What is the result of the government investing in systems with higher costs than benefits?

Answer 31

Welfare loss ## Footnote This reflects inefficiency in resource allocation and potential negative impacts on society.

Question 32

Is it practical or possible for the government to obtain every piece of information needed?

Answer 32

No ## Footnote This limitation complicates effective decision-making processes.