Market Mechanism and Government intervention

Question 1

What is an indirect tax

Answer 1

a tax that is levied on goods and services rather than or income (they can be transferred)

Question 2

what is a direct tax

Answer 2

• taxes levied against individuals or agents that is payed directly to government meaning they cannot be transfered

Question 3

How can subsidy’s create a deadweight welfare loss

Answer 3

• if governments artificially increase demand passed MSB
• Tax payers money is used to pay for the extra revenue (graphical representtation)

Question 4

how can subsidy’s create an opportunity cost

Answer 4

government revenue could be spent on more productive areas of the economy

Question 5

What is a maximum price

Answer 5

• Price set below equilibrium in order to increase affordability

Question 6

what are negative externalities

Answer 6

• When there is a negative external cost of production or consumption that is not reflected in the price of the good

Question 7

what are 3 examples of negative externalites

Answer 7

• All forms of pollution
• Public health issues
• overconsumption of natural resources

Question 8

what is the social cost = too

Answer 8

Private cost + external costs

Question 9

what is a positive externality

Answer 9

where there is benefits to a third party from consumption or production of a good

Question 10

examples of positive externalities

Answer 10

• scientific research
• Education and healthcare
• Renewable energy

Question 11

what is a merit good

Answer 11

goods that are more beneficial to consumers than they realize

Question 12

What is a demerit good

Answer 12

More harmful to consumers than they realize

Question 13

What too conditions dictate wether a good is a public good

Answer 13

• non rival
• non excludable

Question 14

What is a non rival good

Answer 14

Quantity does not diminish no matter how much the good is consumed.

Question 15

what is non excludable

Answer 15

people cannot be prevented from using it even if they didn’t pay

Question 16

what is a free rider

Answer 16

An agent that doesn’t contribute to the purchase of the good however wills still use it

Question 17

Why are public goods not provided by the free market

Answer 17

there is no demand for public goods charged at a price because of the free rider problem therefore the free market wont supply them

Question 18

what is a quasi public good

Answer 18

Shows characterisitcs of both public and private goods

Question 19

what can help make public goods into private goods

Answer 19

technology

Question 20

What is complete market failure

Answer 20

When the market for a good is not provided even though society values it

Question 21

what is partial market failure

Answer 21

when the quantity supplied of the good is too much or too little leading to welfare loss

Question 22

What is government failure

Answer 22

The cost of intervention out ways the benefits

Question 23

consequence of over subsidization

Answer 23

• Encourages subsidy dependence
• Corruption (subsidy taken as dividends)

Question 24

What is a regulation

Answer 24

A rule of law that encourages certain economic agent behavior

Question 25

What are the two types of regulation

Answer 25

Command - setting of regulation(bans, limits, laws) control - enforcement of those regulations (enforcement, punishment, education)

Question 26

what is State provision

Answer 26

Direct provision of a good or service at the point of consumption

Question 27

2 factors that determine wether a good should be state provided

Answer 27

- it has to be a merit good - Serious welfare loss if provision of the good was left to the free market

Question 28

2 pros and cons of using information provision to combat market failure

Answer 28

Pros - low costs - low chance of serious failures Cons - subject to manipulation - no guarantee of success - Time frame of success will be in the long run

Question 29

What are property rights

Answer 29

Rights that determine who owns or managers a good

Question 30

3 ways in which can property rights stop overconsumption.

Answer 30

- Ownership promotes accountability - internalizing costs - exclusion of free riders ( reduces tragedy of the commons)

Question 31

3 cons of a free market

Answer 31

- Market failure - Inequality - consumer exploitation

Question 32

all types of market failure

Answer 32

- externalities - Merit/ Demerit goods - Public goods - Common access resources

Question 33

what are the criticism of government intervention

Answer 33

- is there really a major social cost - is there market solutions - Government failure

Question 34

2 effects of an indirect tax

Answer 34

allocative efficiancy unintended consequences (black markets, regressive)

Question 35

effects of a subsidy

Answer 35

inefficiency (overreliance/corruption/opportunity cost, deadwieght loss) improves innovation (unemployment) improves outcome for poor

Question 36

effects of minimum price

Answer 36

- protects from price volatility - excess supply bought by government - reggressive - increase quality

Question 37

effects of maximum price

Answer 37

discourages investment reduced quality

Question 38

reasons why merit and demerit goods are overconsumed

Answer 38

- importance decided by politicions - biases/imperfect information - underprovided/overprovided by free market

Question 39

effects of regulation

Answer 39

low cost/risk unintended consequences

Question 40

2 positives of state provision

Answer 40

accessibility/efficiency/equity protect against shocks

Question 41

negativity of state provision

Answer 41

p=0 creates excess demand that has to be rationed by the government cost to finances + future

Question 42

evaluation points on all policy's

Answer 42

unintended consequences and government failure

Question 43

What is a social tariff and what are the pros and cons

Answer 43

Social tariff is when a firm price discriminates for the good of society, energy company’s have been seen to do this - increased availability of necesaty goods - reduced poverty However: Cross subsidisation (other consumers paying the cost)