topic 4: govt. intervention

Question 1

tax

Answer 1

[indirect tax] achieve allocative efficiency (reduce demand for particular demerit good), raise revenue for govt: to fund provision of public goods/ subsidise goods
COP increases, SS curve shift leftwards.
- gap btn the SS curve is “tax per unit” on Q1

Question 2

tax incidence

Answer 2

tax incidence: distribution of tax burden btn producers and consumers
- DD is price inelastic: greater tax incidence on consumers, difficult switching away from good, exp large increase in prices, larger amt of per unit tax needs to be imposed to achieve intended fall in qty
amt P1P2 has to be given to govt, producers end up receiving p2 as compared to p0 previously
- DD more price elastic: larger tax burden on producers

Question 3

DWL due to tax

Answer 3

area C+E: small triangle tip (fall in CS and PS)

Question 4

indirect subsides

Answer 4

increase allocative efficiency -> achieve optimal level of consumption (increase consumption of merit goods)/ promote equity (lower P of essential goods), encourage firms to innovate (increase productivity)
lower COP, increases supply

Question 5

subsidy incidence

Answer 5

• extent of price decrease larger when demand for good more price inelastic [larger subsidy to be given to achieve intended fall in qty dd - consumers are less responsive] -> consumers enjoy larger incidences (larger share of subsidy)

Question 6

DWL due to subsidy

Answer 6

consumers pay less, producers receive more (increase in CS and PS)
Area F (inverted triangle btn ss curves)

Question 7

price control - price ceiling

Answer 7

legally established maximum price : producers prohibited from selling good above max. price

• price ceiling must be set below eqm P (Pmax)
  aim: to ensure affordability of basic necessities
• shortage as Qd>Qs (lead to formation of black markets)
• reduction in producers revenue

Question 8

black markets due to price celing

Answer 8

some consumers willing to pay beyond Pmax to consumer goods.

• if sellers able to get hold of Qmax of goods, they can sell good at Pb, able to earn extra revenue
• the more price inelastic the DD is, the greater revenue that can be earnned
• lead to inequity, worsen affordability for lower income groups

Question 9

DWL due to price ceiling

Answer 9

tip of triangle area C+E

Question 10

price floor

Answer 10

legally established min. price- firms not permitted to sell goods below min. price
aim: protect incomes of producers (farmers)
protect low-skilled/low-income workers (min. wage)

• price increase, qty dd fall, qty ss increase
• surplus Q1Q2, the more elastic dd and ss, the greater the surplus
• increase in total revenue (esp if dd is price inelastic)
  but
  allocative inefficient
  productive inefficient(firms unmotivated to find more efficient method to reduce COP) if profits protected by price floors

Question 11

DWL due to price floor

Answer 11

• fall in CS, rise in PS, DWL is QdQs (surplus)XP

C,E,I,G,H (excluding F) - 2 trapeziums

Question 12

quota

Answer 12

quantitative restriction on output
quota must be set below mkt eqm qty (vertical SS curve)
- price is higher - fall in CS
DWL: tip of triangle (C+E)

Question 13

wage differentiation

Answer 13

higher wage rate: high-skilled labour
PED<1: training requires time, min job entry qualification
PED<1: necessity, skills has lack of close subsitutes

Question 14

min. wage

Answer 14

ensure equity
wage rate increases from We to Wf
no, of ppl willing to work increases to L2, firms only willing to employ L1, surplus of L1L2