Theme 1.4

Question 2

Where is the minimum prices set in relation to the equilibrium price?

Answer 2

Above

Question 3

Give the reason for govs to impose minimum prices

Answer 3

Protecting producers

Reducing consumption

Correcting market failures

Question 4

Give the evaluation points for setting a minimum price

Answer 4

Price inelastic demand

Regressive

Black Market

Unintended consequence

Question 5

Explain the evaluation points for setting a minimum price : price inelastic demand

Answer 5

If demand= price inelastic , the fall in QD will be proportionately less than the increase in P and therefore won’t see the fall in quantity enough to fully solve the market failure.

The quantity doesn’t reduce to social optimum level (Q*) -> externality isn’t internalised.

Question 6

Explain the evaluation points for setting a minimum price : Regressive

Answer 6

It will take a greater proportion of the income of the poor than that of the rich -> burdens the poor -> income inequality-> MACRO OBJECTIVE

Question 7

Explain the evaluation points for setting a minimum price : Black Market

Answer 7

Individuals affected by the increase in P can source alternative supply in the black market -> the quality of the good= bad + alternative supply in the form of cheaper/worse food which doesn’t solve the market failure (worsens it).

Smuggling-> e.g buying alcohol in England and bringing it back to Scotland (where the min price is imposed) - gov failure + tax rev lost (unintended consequences)

Question 8

Explain the evaluation points for setting a minimum price : Unintended consequences- set at the right level?

Answer 8

If the min price set = too high and it isn’t internalising the externality, this could have U.C on producers (gov failure) -> they may leave the country, shutdown, unemployment

EVAL: if demand = price inelastic, producers will see an increase in revenue

Question 9

AO2- Minimum price

Answer 9

Scotland and Canada imposed a minimum price on alcohol

Question 10

What happens to demand when a minimum price is imposed?

Answer 10

Contracts

Question 11

Explain the reasons for imposing minimum prices : protecting producers

Answer 11

Protecting producers : ensures they revive a certain income level , particularly in sectors where production costs are high. E.g Agricultural products have min prices to protect farmers

Question 13

Explain the reasons for imposing minimum prices : reducing consumption

Answer 13

Used to discourage consumption of demerit goods such as alcohol. Higher prices can lead to lower demand , helping to address negative externalities associated with their consumption

Question 14

Explain the reasons for imposing minimum prices : correcting market failure

Answer 14

Helps to address market failure such as in the case of monopoly power, where a single firm can set prices significantly above the competitive level

Question 15

Define maximum price

Answer 15

A legally imposed max price in a market that suppliers can’t exceed - in an attempt to prevent the market price from rising above a certain level

Question 16

Where are maximum prices set in relation to the free market equilibrium

Answer 16

Below

Question 17

Why are maximum prices imposed?

Answer 17

To promote equity and the consumption of essential goods or services

Question 18

AO2 - maximum price - Venezuela

Answer 18

In Venezuela, the government imposed maximum prices on basic food items like milk, flour, and cooking oil to make them affordable during high inflation.

Question 19

AO2 - maximum price - New York & Berlin

Answer 19

New York City government imposed max prices on rental properties (rent control) to make housing affordable for low-income residents.

In 2020, Berlin introduced a rent cap limiting the max rent landlords could charge, aiming to tackle rising housing costs.

Question 20

Explain the evaluation point for setting a maximum price (relating to renting accommodation) : cost

Answer 20

Cost - if the govs aren’t happy w/ shortage and want to ⬆️ supply to get it to equal QD, it can be costly: they may subside private landlords or produce their own housing = $$ -> opportunity cost ~ a cost dealing w/ the inefficiencies THEY’VE caused - large gov failure

Question 21

Give the evaluation points for setting a maximum price :

Answer 21

Cost

Enforcement

Formation of Black Markets

Setting the right level

Shortage

Question 22

Explain the evaluation point for setting a maximum price (relating to renting accommodation) : enforcement

Answer 22

Who will be checking landlords aren’t charging prices beyond Pmax?

Question 23

Give the evaluation points for setting a maximum price : setting the right level

Answer 23

Set too low- massive excess demand

Set too high- may not see the promotion of equity and greater consumption that’s desired

Question 24

Explain the evaluation point for the use of indirect taxes correcting market failure : price inelastic demand

Answer 24

Price inelastic demand- for I.T to work in reducing qty to social optimum, demand needs to be more price ELASTIC (more responsive to ⬆️P) . E.g cigs -> price inelastic demand -> even if ⬆️P, QD ⬇️ PROPORTIONATELY LESS than the increase in price -> not enough to solve market failure.

Question 25

Give the considerations when using indirect taxes to solve market failure (evaluation)

Answer 25

Price inelastic demand

Setting tax at right level

Question 26

Explain the evaluation point for the use of indirect taxes correcting market failure : Setting Tax at right level

Answer 26

Govs don’t have perfect info over the value of the negative externality and therefore they’ll set the tax wrong and won’t internalise the externality. Problems: Over taxing -> creation of black markets, smuggling , regressive, firms may shutdown/relocate -> unemployment. Under taxing -> won’t fully internalise the externality, qty won’t fall towards social optimum

Question 27

What is the affect of an indirect tax in the market when correcting a market failure

Answer 27

1. Increases cost of production (MPC left shifts- ALWAYS) 2. Internalises the externality 3. Solves overproduction/consumption 4. Promotes A.E whilst generating gov rev which can be used to educate, advertise, subsidise alternatives e.g to correct addiction, subsidise de addiction campaigns

Question 28

Define subsidy

Answer 28

Money grant given to producers by the gov to lower C.O.P and encourage an increase in output

Question 29

What is the aim of a subsidy

Answer 29

Solve any market failure where these an under consumption/production taking place

Question 30

What will the subsidy do to correct market failure?

Answer 30

1.Lowers firm’s C.O.P (MPC Right shifts -ALWAYS) (new MPC curve hits MPB at the socially optimum level) 2.Lowers price for consumers and increases quantity produced 3.Solves under consumption/ production 4.A.E & welfare gain

Question 31

Give examples of subsides -AO2

Answer 31

Hong Kong- COVID 19 vaccination subsidies - encourage widespread immunisation and reduce virus spread. England- Bus & Railways - in 2023 the gov introduced a £2 bus fare cap and allocated £500m to extend the scheme until Dec 2024 - lower fares discourage car usage and maintains affordability to encourage commuters from low income backgrounds

Question 32

What are the evaluations of using subsidies to correct market failures?

Answer 32

Costly to the government Is it set at the right level? How will firms use the subsidy Price inelastic demand

Question 33

Explain the following evaluation point for the use of subsidies to correct market failure : costly to the government

Answer 33

If money has been borrowed to finance the sub: - future tax rises ? (Burdens the poor) - future spending cuts? (To welfare, education etc) -> OC + burdens the poor - debt interest repayments = $$$ - if the extend of the M.F = limited, could this $ have been used elsewhere?

Question 34

Explain the following evaluation point for the use of subsidies to correct market failure : is it set at the right level

Answer 34

We assume Gov have perfect info about the VALUE of the positive externality however this isn’t the case. Govs may: Under sub: MPC will be in the middle somewhere and we won’t get to Q* (social optimum) to solve the MF. Over sub: - Cost ⬆️⬆️-> gov failure - LR over dependency - firms will allow costs to ⬆️ knowing gov will cover it

Question 35

Explain the following evaluation point for the use of subsidies to correct market failure : How will firms use the subsidy?

Answer 35

Assumed they will lower their C.O.P and pass on lower P but they may: - pay off debts - ⬆️ worker salary - save it in the bank - pay shareholders greater dividends Which results in gov failure

Question 36

Explain the following evaluation point for the use of subsidies to correct market failure : Price inelastic demand

Answer 36

For a subsidy to work = PED, greater ⬆️ in qty in the market will be enough to solve the MF

Question 37

How do we show the cost to the government (for subsidies) and the tax revenue (for indirect taxes)?

Answer 37

1. Go to the equilibrium 2. The vertical distance between the 2 supply curves 3. Multiply the qty

Question 38

Which direction does the subsidy cause the supply curve to move and why

Answer 38

Right To lower firm’s cost of production

Question 39

Which curve is moved when a subsidy is introduced in the market to correct market failure

Answer 39

MPC

Question 40

Which diagram is drawn when showing the effect of the subsidy on the market?

Answer 40

Positive Externality in Consumption/ Merit Good

Question 41

Define regulation

Answer 41

Gov rules and standard to ensure market participants follow specific guidelines to encourage a change in behaviour

Question 42

For regulation to work it’s split into 2 parts, what are they and what do they consist of?

Answer 42

Command : - bans e.g (UK) 2007 smoking ban in enclosed spaces - limits e.g age - for buying cigs, time- when alcohol can be served - caps e.g emission caps, number of fish that can be taken out of sea by fishermen -compulsory e.g graphic images on cigs Control: - effective enforcement - punishment- fines , jail time etc

Question 43

What are the aims of regulation

Answer 43

For market participants to have an incentive to change behaviour; moving qty to social optimum level to solve issues in free markets and allow for A.E and welfare gain.

Question 44

Give the evaluation point for using regulation to solve market failure

Answer 44

Cost- admin, enforcing/monitoring -> if five can’t afford cost= poor regulation due to weak enforcement. Setting the right regulation- too strict. : unintended consequences- burdening firms ( ⬆️C.O.P, ⬇️profit -> leave country, unemployment) consumers -> seek alternatives from black market/smuggling -> loss of tax revenue + more policing = costly. Too lax: no incentive to change behaviour to solve M.F Regulation has a paternalistic nature - lack of freedom/choice which removes market benefits- use other policies instead?

Question 45

Give the causes of government failure

Answer 45

U DIE Unintended consequences Distortion of price signals Information Gaps Excessive Administrative costs

Question 46

Define government failure

Answer 46

When Gov intervention in the market leads to net welfare loss and a misapplication of resources The total SC arising from the intervention are greater than the social benefit

Question 47

Describe information gaps as a cause of government failure

Answer 47

When the government/politicians fails to value externalities therefore the right level of policy require to correct market failure

Question 48

Describe excessive administrative costs as a cause of government failure

Answer 48

Very high in policies such as: Regulation Subsidies State provision Price controls

Question 49

Describe unintended consequences as a cause of government failure

Answer 49

The formation of black markets Impacts on the poor / firms Impact on employment

Question 50

Define trade pollution permits

Answer 50

Issued by Gov to authorise producers to produce a specified amount of pollution. They can sell excess permits or buy more from other firms.

Question 51

What are the advantages of trade pollution permits

Answer 51

Encourages companies to invest in green tech Gov raise revenue -> selling permits and fining firms who exceed their pollution limit

Question 52

What are the disadvantages of trade pollution permits

Answer 52

Expensive to monitor Raises business costs-> passed onto consumers Difficult to know how many permits the gov should allow to correct the market failure

Question 53

What do high polluters do with pollution permits

Answer 53

Buy more which increases their costs and makes them less competitive as their cost has increased

Question 54

What do low polluters do with pollution permits

Answer 54

Receive extra rev from selling their surplus permit Makes them more competitive More profit

Question 55

What effect does the fixed supply of permits have on demand and price

Answer 55

Increases demand which will increase the price -> firms will have more incentive to cut emissions by using greener tech

Question 56

Give an example of trade pollution permits - AO2

Answer 56

The EUETS allows companies to trade carbon emissions permits, allowing the reduction of greenhouse gas emissions

Question 58

Which curve shifts and in which direction, when indirect taxes are used to correct market failure?

Answer 58

MPC Left