Government Intervention

Question 1

Why do government use indirect taxes

Answer 1

To affect the supply of some goods/services

Question 2

Define indirect tax

Answer 2

Can be imposed on the purchase of goods or services to cover the new extra cost incurred by firms because of the tax

Question 3

What are the two types of indirect tax

Answer 3

Specific tax

Ad valorem tax

Question 4

Define specific tax

Answer 4

A fixed amount is charged per unit of good

Question 5

Define ad Valorem tax

Answer 5

Charged as a proportion of the price of a good

Question 6

Draw a specific tax curve

Answer 6

…

Question 7

Draw an ad valorem tax curve

Answer 7

….

Question 8

What are the properties of a specific tax curve

Answer 8

Tax is the same fixed amount at a low price and high price

Question 9

What are the properties of ad valorem tax

Answer 9

Non parallel shift

Biggest impact on higher price goods

Tax is smaller at low price and higher at high price

Question 10

Why do government tax goods with negative externalities

Answer 10

To internalise the externality that the good produces

I.e. make the producer or consumer of the product cover the cost of the externality

Question 11

What is an example of a specific tax

Answer 11

Landfill tax

Question 12

Define consumer burden

Answer 12

..

Question 13

Define producer burden

Answer 13

…

Question 14

What are the advantages of indirect tax

Answer 14

Cost of the negative externalities is internalised in the price of the good

Question 15

Disadvantages of indirect tax

Answer 15

Difficult to put monetary value on the cost of the negative externalities

Increase the costs of production

Reduce international competitiveness

Question 16

Subsidies are usually paid to producers by the government

Answer 16

…

Question 17

What is the aim of subsidies

Answer 17

Used to encourage the production and production of goods + services with positive externalities

Can also be used to reduce negative externalities (reduce pollution on roads) by e.g. subsidising electric cars

Question 18

Draw a subsidies diagram with labels showing total cost of subsidy to government, consumer gain and producer gain

Answer 18

…

Question 19

Benefit gained from subsidies Is proportionate to

Answer 19

The elasticity of the supply + demand curves

Question 20

Advantages of subsides

Answer 20

-benefit of goods with positive externalities is internalised I.e. cost of externalities is covered by subsidy
-subsides can change preferences
E.g. merit good cheaper -> more affordable -> Inc. Demand

Question 21

Disadvantages of subsidies

Answer 21

Difficult to put monetary value on the benefit of the positive externalities

Opportunity cost

May make producers inefficient and reliant

Subsidised goods/services may not be as good as the ones they’re aiming to replace

Question 22

Why might a max price be set

Answer 22

To increase consumption of a merit good or to make a necessity more affordable

Question 23

What does It mean on a diagram when the max price is set above the equilibrium curve

Answer 23

Has no impact

Question 24

What does It mean in a max price diagram if the max price is set below the equilibrium

Answer 24

Leads to excess demand

Shortage of supply

Rationing function

Excess demand cannot be cleared by market forces

Question 25

Advantages of a max price

Answer 25

Increases fairness Prevent monopolies from exploiting consumers

Question 26

Disadvantages of max price

Answer 26

Some people will be unable to buy Introduce rationing scheme to allocate good Excess demand can lead to the formation of a black market

Question 27

Why are minimum prices set

Answer 27

So suppliers can get a fair price

Question 28

With minimum price, if it is set below market equilibrium

Answer 28

It has no impact

Question 29

With minimum price, if above the equilibrium it will

Answer 29

Have an impact

Question 30

Advantages of a minimum price

Answer 30

Producers have a guaranteed minimum income Encourages investment

Question 31

Disadvantages of a minimum price

Answer 31

Resources used to produce excess supply could be used elsewhere Destroying excess goods is a waste of resources

Question 32

What is state provision

Answer 32

Where government provide certain goods + services

Question 33

What funds state provision

Answer 33

Tax revenue Pay for certain goods + services-> free or mostly free

Question 34

Disadvantages of state provision

Answer 34

Less incentive for firms to operate efficiently May fail to respond to consumer demands -> lacks profit motive Reduce self reliance

Question 35

Why is health care funded by gov

Answer 35

Society benefits from positive externalities

Question 36

What are the disadvantages of health care being funded by government

Answer 36

Excess demand , long waiting lists Wasteful of resources May not always respond to patient wants + needs Reduce self reliance-> have hospital visits for minor problems

Question 37

Draw a minimum price diagran

Answer 37

....

Question 38

Define regulation

Answer 38

Rules enforced by an authority usually backed up with legislation

Question 39

What is regulation used for

Answer 39

To control the activities of producers + consumers , change the undesirable behaviour Reduce use of demerit goods + services Reduce power of monopolies Provides some protection from asymmetric information

Question 40

Why can regulation be difficult to set

Answer 40

Can be expensive to monitor compliance If punishment for breaking isn't harsh, may not be a deterrent and change behaviour

Question 41

What can regulating bodies do

Answer 41

Set rules and impose price controls Used to increase competition in a market E.g. ofcom

Question 42

What will provision of information do

Answer 42

Impact the demand for the good

Question 43

What can government intervention cause

Answer 43

Misallocation of resources + net welfare loss (gov failure)

Question 44

Define government failure

Answer 44

Unintended consequence of an intervention to correct a market failure

Question 45

What can government intervention cause

Answer 45

Market distortion

Question 46

How does government bureaucracy interfere how the market works

Answer 46

Rules + regulations (red tape) to prevent marker failure -> enforcement of these is bureaucracy

Question 47

What is excessive bureaucracy

Answer 47

Government failure

Question 48

What is regulatory capture

Answer 48

Influence the decisions of the regulator to make sure outcomes favour companies and not the consumers

Question 49

Sources of government failure

Answer 49

Conflicting policy objectives Inadequate information Administrative costs Regulatory capture

Question 50

Examples of government failure

Answer 50

The common agricultural policy

Question 51

Why might gov provide subsides to public transport

Answer 51

Reduce car usage + pollution level However bus travel is seen as an inferior good so if it is cheaper it may not have an increase in demand

Question 52

Why might government introduce fishing quotas

Answer 52

Make fishing more sustainable + prevent overfishing

Question 53

Problem with fishing quotas

Answer 53

Fish stocks depleting even with quotas in place -> suggests quotas have been set too high and overfishing is still taking place Poor monitoring of fish catches, boats could be overfishing undetected

Question 54

What is consumer burden

Answer 54

The amount of tax that is passed onto a consumer from an increase (ad valorem)

Question 55

What Is producer burden

Answer 55

The amount of tax absorbed by the firm Amount of tax The firm still has to pay after passing on some of the burden onto consumers