Micro 1.4

Question 1

What is indirect taxation?

Answer 1

A tax imposed on goods with negative externalities to prevent market failure.

Question 2

What happens to the supply curve when indirect taxation is introduced?

Answer 2

It shifts from S1 to S2, increasing costs to the individual.

Question 3

What is the free market equilibrium position represented by?

Answer 3

P1Q1, where MPC=MPB.

Question 4

What is the social optimum position where social welfare is maximized?

Answer 4

P2Q2, where MSB=MSC.

Question 5

What is the effect of introducing a tax on social welfare?

Answer 5

It internalizes the externality and maximizes social welfare.

Question 6

What are the advantages of indirect taxation?

Answer 6

• Internalizes externalities
• Raises government revenue
• Potentially makes goods more elastic

Question 7

What are the disadvantages of indirect taxation?

Answer 7

• Difficult to determine the size of the externality
• Conflict between revenue raising and solving externality
• Creation of black markets
• Ineffectiveness if demand is inelastic
• Politically unpopular
• Regressive nature

Question 8

Name some examples of indirect taxes used in the UK.

Answer 8

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

Question 9

What do subsidies aim to achieve?

Answer 9

They aim to correct positive externalities and information gaps.

Question 10

What is the effect of subsidies on the supply curve?

Answer 10

It shifts the supply curve to the right, lowering the cost of production.

Question 11

What is the social optimum output where welfare is maximized after introducing a subsidy?

Answer 11

P2Q2.

Question 12

What are the advantages of subsidies?

Answer 12

• Reaches social optimum output
• Encourages small businesses
• Promotes equality
• Encourages exports

Question 13

What are the disadvantages of subsidies?

Answer 13

• High opportunity cost
• Difficult to target
• Can cause inefficiency in producers
• Difficult to remove once established

Question 14

Name some examples of subsidies provided by the government.

Answer 14

• Biofuels
• Solar panels
• Apprenticeship schemes
• Wind farms
• Rail industries

Question 15

What is a maximum price?

Answer 15

A legally imposed price that suppliers cannot charge above.

Question 16

What must a maximum price be set below to have an effect?

Answer 16

The current price equilibrium.

Question 17

What is a minimum price?

Answer 17

A legally imposed price that the price of a good cannot go below.

Question 18

What must a minimum price be set above to have an effect?

Answer 18

The current price equilibrium.

Question 19

What are the advantages of maximum and minimum prices?

Answer 19

• Consideration of externalities
• Ensures affordability of goods
• Ensures fair prices for producers
• Can reduce poverty and increase equity

Question 20

What are the disadvantages of maximum and minimum prices?

Answer 20

• Distortion of price signals
• Excess supply/demand
• Difficulty in setting appropriate prices
• Potential for black markets
• Possible illegal bribes or discriminatory allocation

Question 21

What is a pollution permit?

Answer 21

A permit allowing the owner to pollute up to a specific amount, with a limited supply controlled by the government.

Question 22

What happens if companies exceed their pollution limits?

Answer 22

They face legal action.

Question 23

What is the purpose of tradable pollution permits?

Answer 23

To incentivize companies to cut emissions by using greener technology.

Question 24

What is the free rider problem?

Answer 24

A situation where public goods are under-provided by the free market due to non-excludability and non-rivalry.

Question 25

What are public goods?

Answer 25

Goods that are non-excludable and non-rivalrous.

Question 26

What is government failure?

Answer 26

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

Question 27

What are some causes of government failure?

Answer 27

* High administration costs * Inefficient production * Regulatory capture * Distortion of price signals * Unintended consequences of policies

Question 28

What is the impact of excessive regulation?

Answer 28

It may reduce competition and efficiency.

Question 29

What is the role of government in providing information?

Answer 29

To allow consumers to make informed decisions and to force companies to provide information.

Question 30

What are some examples of information provision by the government?

Answer 30

* Labels on cigarette packages * Information campaigns on health issues * Consumer protection laws * Traffic light system for food

Question 31

What is the effect of asymmetric information in markets?

Answer 31

It leads to market failure, prompting government intervention to provide information.

Question 32

What are unintended consequences in government interventions?

Answer 32

Effects that the government did not intend to happen ## Footnote This can occur when consumers and producers react unexpectedly to new policies.

Question 33

What was the intended purpose of the buffer stock scheme CAP in the EU?

Answer 33

To smooth out price fluctuations ## Footnote The scheme unintentionally led to overproduction and falling agricultural prices globally.

Question 34

What was an unintended outcome of the buffer stock scheme CAP?

Answer 34

Overproduction in the EU and a fall in agricultural prices in other parts of the world ## Footnote EU surpluses were disposed of at cheap prices outside of Europe.

Question 35

What impact did NHS patient treatment targets have?

Answer 35

Reduction in the quality of care ## Footnote This was not the government's intention when introducing the targets.

Question 36

What are information gaps in government decision-making?

Answer 36

Limited data available for decision-making ## Footnote It is impossible to predict certain variables accurately, such as the number of cancer patients.

Question 37

What is a consequence of inaccurate cost and benefit forecasts?

Answer 37

Welfare loss due to investments with higher costs than benefits ## Footnote Governments often struggle to gather all necessary information for accurate forecasts.

Question 38

Fill in the blank: Excessive _______ costs can hinder effective government interventions.

Answer 38

administration ## Footnote High administrative costs can divert resources from intended outcomes.

Question 39

True or False: The government can always accurately predict the number of cars on the road.

Answer 39

False ## Footnote Predicting such variables is impractical and often impossible.