Topic 5.8 Government Intervention

Question 1

What are the ways in which governments can intervene to address market failure

Answer 1

1) Indirect taxation
2) Subsidies
3) Price controls
4) Regulation
5) State provision

Question 2

Indirect taxation (draw 4 diagrams with elasticity and reasons for each)

Answer 2

This is a tax on a good/service
4 Diagrams involve:
1) Inelastic demand
2) Elastic demand
3) Inelastic supply
4) Elastic Supply

Question 3

Incidence of tax

Answer 3

The incidence (or burden) of tax is the amount that the consumer (or producer) will pay for the tax.

Question 4

Evaluation on indirect taxation

Answer 4

1) Bad for consumers: they are highly regressive therefore they take a larger proportion of income from low-income households than high-income households.
2) Bad for producers/workers: less total revenue as quantity demanded decrease, unemployment as it’s derived demand
3) Good for governments: raises government revenue -> solve partial market failures. However does bear in mind effects such as black markets, lower SOL, businesses leaving the country.

Question 5

Grant

Answer 5

One-time payment a business receives from the government.

Question 6

Subsidy (draw 4 diagrams with elasticity and reasons for each)

Answer 6

Money given by the government in order to decrease costs of production (not one-off) and encourage an increase in output.
4 Graphs:
1) Inelastic demand
2) Elastic demand
3) Inelastic supply
4) Elastic Supply

Question 7

What type of goods get taxed

Answer 7

Demerit goods

Question 8

What type of goods get subsidised

Answer 8

Merit goods