Unit 4 Government Intervention

Question 1

reasons for govt intervention

Answer 1

to raise revenue, support firms, support low income households/promote equity, influence the level of production & consumption of certain goods and services/correct market failures

Question 2

how the govt intervention raises their revenue

Answer 2

taxation

Question 3

tax revenues

Answer 3

a government’s primary source of revenue

Question 4

direct taxes

Answer 4

taxes on incomes earned by households and firms

Question 5

indirect taxes

Answer 5

taxes on consumption which are paid by consumers through producers, and are given to the government

Question 6

“Progressive in nature”

Answer 6

the percentage paid is proportional to the income received

Question 7

“Regressive in nature”

Answer 7

low income individuals pay more as a percentage of their income

Question 8

methods for govt intervention to supports firms

Answer 8

subsidies to certain firms/industries, tax concessions to certain firms/industries, protectionist measures from imports for certain firms/industries, loans to certain firms/industries, financial bailouts to certain firms/industries

Question 9

rationale for govt intervention to supports firms

Answer 9

to help small industries grow, to protect jobs from overseas competition, to protect infant industries, to ensure critical/strategic industries are operational

Question 10

methods for govt intervention to support low income households/to promote equity

Answer 10

taxes, transfer payments, providing basic infrastructure - water pipes/electricity etc.

Question 11

rationale for govt intervention to support low income households/to promote equity

Answer 11

the free market economy is designed so that those who work hard, have skills, have opportunities, have risk-taking outlook, or have ownership of factors of production will be rewarded, is not concerned with equity, and will make people low income - lacking the money for the basics of living (sanitation, education, health, malnutrition etc.)

Question 12

negative externalities

Answer 12

goods that create negative spillover costs, both when consumed and/or produced e.g. pollution

Question 13

methods for govt intervention to influence the level of production & consumption of certain goods & services/to correct market failures

Answer 13

combination of regulation/legislation, the government tries to influence (decrease) the levels of consumption/production

Question 14

rationale for govt intervention to influence the level of production & consumption of certain goods & services/to correct market failures

Answer 14

the free market overproduces products

Question 15

market failures the govt corrects

Answer 15

positive and negative externalities created by consumption and production, monopoly/power abuse, public goods, demerit and merit goods

Question 16

two types of taxes

Answer 16

direct, indirect

Question 17

types of direct taxes

Answer 17

income, corporate, capital gains

Question 18

income taxes

Answer 18

money taken out of wages

Question 19

corporate taxes

Answer 19

money taken out of any profit made

Question 20

capital gains taxes

Answer 20

money taken out of profit from investments, bank interest, shares, property

Question 21

types of indirect taxes

Answer 21

specific (unit/excise), ad valorem

Question 22

specific taxes

Answer 22

a fixed amount of tax per unit on a particular good or service sold

Question 23

ad valorem taxes

Answer 23

a fixed percentage of the price of the good or service, general sales taxes or value added taxes - the amount of tax increases as the price increases

Question 24

why the govt imposes indirect taxes

Answer 24

source of revenue, method to discourage consumption of harmful goods, can be used to redistribute income, method to improve the allocation of resources by correcting negative externalities

Question 25

how excise taxes can be used to redistribute income

Answer 25

luxury goods are taxed to narrow the difference between higher and lower income earners

Question 26

stakeholders

Answer 26

individuals or groups have an interest in something and are affected by it

Question 27

consequences of indirect taxes for consumers

Answer 27

receive less of the good and are paying more for it

Question 28

consequences of indirect taxes for producers

Answer 28

experience a fall in their revenues

Question 29

consequences of indirect taxes for workers

Answer 29

fewer workers are needed to produce products → unemployment

Question 30

consequences of indirect taxes for the govt

Answer 30

the only stakeholder that gains, as it gains tax revenue for its budget

Question 31

other consequences of indirect taxes

Answer 31

taxes raise prices → shift supply curve to the left and reduces output → market size shrinks, unemployment

Question 32

subsidy

Answer 32

assistance by the government to firms, consumers, industries or sectors of an economy; acts as an incentive to produce more and lowers the marginal cost of production

Question 33

subsidy forms

Answer 33

direct cash payments or other forms of assistance e.g. low-interest for college tuition or buying a home, tax relief

Question 34

rationale for subsidies

Answer 34

1. to increase the consumption of goods by lowering the price 2. support a particular industry by helping with production costs 3. encourage exports and address a balance of payments deficit by increasing export revenue 4. encourage other firms to join the market and hence increase competition/prevent monopolies arising

Question 35

merit goods

Answer 35

goods deemed beneficial for society

Question 36

graphical impact of subsidies

Answer 36

shifts the supply curve to the right by the amount of the subsidy because producers are willing to supply more than previously, as the govt is subsidizing the cost - reduces the market price, increases quantity traded

Question 37

impact of subsidies on consumers

Answer 37

consumers benefit, as the market price is lowered, thus more people are able and willing to buy the good

Question 38

impact of subsidies on producers

Answer 38

producers benefit, as their production costs are reduced which helps to improve their competitiveness and profitability

Question 39

impact of subsidies on the govt

Answer 39

govts spend money on financing the subsidy, but there is an opportunity cost in doing so the net benefits to society may outweigh the costs

Question 40

advantages of subsidies

Answer 40

1. controls price inflation 2. boosts employment (especially in poor areas) 3. improves human capital/productivity 4. protects infant industries 5. promotes growing demand for renewability 6. improves affordability for low-income individuals

Question 41

disadvantages of subsidies

Answer 41

1. distortion of market prices 2. risk of fraud for subsidy payments 3. expensive, high cost for taxpayers 4. inequitable, many rich people benefit 5. environmental damage (subsidies on energy industries reduce the incentive to make efficient use of energy) 6. protects inefficient businesses

Question 42

impacts of subsidies on market outcomes

Answer 42

1. equilibrium of quantity produced and consumed increases (Q* → Qsub) 2. equilibrium price decreases (P* → Pc) 3. price received by producers increases (P* → Pp) 4. government spending increases (0 → (Pp - Pc) x Qsub) 5. over allocation of resources, as Qsub is more than Q* 6. firm’s supply curve shifts to the right

Question 43

consequences of subsidies for consumers

Answer 43

better off - decrease in price of goods (P* → Pc), increase in quantity purchased (Q* → Qsb)

Question 44

consequences of subsidies for producers

Answer 44

better off - prices increases (P* → Pp), quantity produced increases (Q* → Qsb), higher revenue from (P* x Q*) → (Pp x Qsb)

Question 45

consequences of subsidies for the govt

Answer 45

worse off - to obtain revenue for the subsidy, the government has to reduce expenditures elsewhere in the economy and may have to raise taxes or run a budget deficit

Question 46

consequences of subsidies for workers

Answer 46

better off - output expands from Q* → Qsb, firms are more likely to hire more workers to produce the extra output

Question 47

positive consequences of subsidies for society

Answer 47

society consumes more merit goods, society gets more equitable, as poor people can afford basics of life

Question 48

negative consequences of subsidies for society

Answer 48

over allocation of resources (Q* → Qsb), the higher price received by producers (P* → Pp) allows relatively inefficient ones to continue producing, subsidy has to be paid for with taxes

Question 49

negative consequences of subsidies for foreign producers

Answer 49

worse off - subsidies are positive for domestic producers, but negative for the producers of other countries who are unable to compete with the lower price of the subsidized goods

Question 50

price controls

Answer 50

a form of government intervention where maximum prices (price ceilings) and minimum prices (price floors) are imposed so that prices are unable to adjust to their equilibrium level determined by demand and supply

Question 51

result of price controls

Answer 51

market disequilibrium, and therefore shortages (excess demand) or surpluses (excess supply)

Question 52

how price controls differ from taxes and subsidies

Answer 52

once they are imposed, they do not allow a new equilibrium to be established and thus forces a persistent market disequilibrium

Question 53

price ceiling

Answer 53

the maximum legal price the government sets for a particular good, below the equilibrium price

Question 54

result of price ceilings

Answer 54

a lower quantity supplied and sold than at the equilibrium price, results in a shortage (excess demand)

Question 55

examples of price ceilings

Answer 55

basic commodities in the Philippines, domestic air travel during World Cups

Question 56

impacts of a price ceiling on supply

Answer 56

1. suppliers would be less willing to supply at the PMax$, leading to a shortage 2. shortages can lead to parallel markets e.g. black markets or more expenses elsewhere e.g. rationing systems, policing/enforcing and other inspectors

Question 57

consequences of a price ceiling on the economy

Answer 57

shortages, non-price rationing, underground (parallel) markets, rnderallocation of resources to the good and allocative inefficiency

Question 58

non-price rationing

Answer 58

refers to a method of dividing up something among possible users

Question 59

positive impacts of a price ceiling on consumers

Answer 59

gain from producers, those who are able to buy the good at a lower price are better off