2.11 Government Intervention (TAXES)

Question 1

what is government intervention

Answer 1

the actions taken by a government to influence or regulate the economy

Question 2

reasons why governments intervene in markets

Answer 2

reduce or eliminate negative externalities

increase or maximise positive externalities

increase the supply of merit goods

reduce the supply of demerit goods

supply public goods that would be undersupplied by the market

reduce inequality and inequity in society

Question 3

what is indirect tax

Answer 3

a tax imposed on producers by the government

Question 4

what is specific tax

Answer 4

is where the tax per unit is a fixed amount - for example the tax per packet of 20 cigarettes

Question 5

what is ad valorem tax

Answer 5

where the tax is a percentage of the cost of supply - eg. the standard 20% VAT

Question 6

what is inequity

Answer 6

lack of fairness and justice

Question 7

explain specific indirect tax on a market to deter market failure

Answer 7

the imposition of an indirect tax will lead to an increase in the cost of supply for a firm

this will lead to a shift in the supply curve up and left

quantity supplied will decrease from q1 to q2 and price will increase from p1 to p2

Question 8

advantages of indirect tax to correct market failure

Answer 8

could reduce the quantity of demerit goods consumed

they can be applied to very specific markets which have market failure

they may encourage the supply of substitute markets that don’t have negative externalities eg. solar power instead of fossil fuels

Question 9

disadvantages of indirect tax to correct market failure

Answer 9

its a regressive tax which makes goods disproportionately more expensive for lower earners

can be difficult to asses the size of tax needed and to implement efficiently

if demand is inelastic a very large tax is needed which can lead to illegal shadow markets