Chains of analysis

Question 1

Indirect tax

Answer 1

Diagram
1)indirect tax is a form of regressive tax which increase firms COP
2)This could cause the supply curve to shift leftwards from S1-S2 meaning that producers are less willing and able to supply at each and every price
3)Consequently, there is a contraction along the demand curve
4)The vertical distance between the two supply curves is the size of the indirect tax being place upon the market
5)The tax can be a useful way to raise the market price from P1-P2 resulting in a decrease in quantity from Q1-Q2
6)This aim to solve the problem of overconsumption/ overproduction of a product
7)There should now be a more socially efficient level of production/consumption and so the tax could be a useful policy tool to reduce the welfare loss to society (link back to the question)
8)and address the market failure to make the market become more allocatively efficient
9) Indirect taxes tend to be regressive, meaning they take a larger percentage of income from low-income earners than from high-income earners.

Question 2

Effectiveness of PED on tax

Answer 2

1)However, the impact of the tax may depend on the PED
2)If the demand for the product is inelastic
3)an increase in the price from P1- P2 will reduce the quantity demanded by less than proportionately
4)For example a 10% increase in price could lead to a 5% decrease in quantity demanded for a PED of -0.5
5)Consequently, the relatively small fall in quantity demanded means costs to third parties may not be reduced significantly
6)and the market failure may not be corrected in the market for demerit goods
7)example of link to case study

Question 3

Subsidies

Answer 3

1)subsidies will decrease firms cost of production
2)This could cause the supply curve to shift to the right S1-S2 meaning that producers are more willing and able to supply at each and every price
3)Consequently, there is an extension along the demand curve
4)The vertical distance between the two supply curves is the size of the subsidy placed upon the market
5)The subsidy can be a useful policy tool to lower the market price from P1-P2 resulting in a increase in quantity demanded from Q1-Q2
6)This aims to solve the problem of underproduction /under consumption of a product
7)There should now be a more socially efficient level of production and consumption and this in turn should reduce the welfare loss to society
8)and if the market failure is addressed, the market should become more allocatively efficient
9)However, subsidies redirect scarce factors of production that have an opportunity cost in their use.
10)Therefore, government need to exercise caution and try to subsidies merit goods as they have a wider benefit to society

Question 4

Regulations - supply side

Answer 4

1)Regulation (give example link to case study) will increase firms cost of production
2)This could cause the supply curve to shift to the left from S1-S2 meaning that producers are less willing and able to supply at each and every price
3)Consequently, there would be a contraction along the demand curve
4)The regulation can be a useful way to increase the market price from P1-P2 resulting in a decrease in quantity demanded from Q1-Q2
5)This aims to solve the problem of overproduction / overconsumption of a product
6)There should now be a more socially efficient level of production / consumption and so the regulation is an effective way to reduce the welfare loss to society (link back to the question)
8)and address the market failure to make the market become more allocatively efficient
9)However,

Question 5

Minimum price

Answer 5

1)The effect of imposing a minimum price can force the market price up prom p1-p2
2)The minimum price causes a disequilibrium in the free market price mechanism which creates excess supply as quantity supplied is greater than quantity demanded at the minimum price
3)Quantity demanded falls from Q1 to Q2 as there is a contraction along the demand curve
4)The new equilibrium in the market is Q2 Pmin
5)This aims to solve the problem of overconsumption / overproduction of a product
6)If the minimum price has been place on a demerit good such as_______they may now be a more socially optimal level of consumption and they market failure may be corrected (link to the question)