1-4 Governement intervention

Question 1

What are indirect taxes?

Answer 1

• Taxes on expenditure, increase production costs for producers, so producers supply less.

Question 2

What are the two types of indirect taxes?

Answer 2

• Ad valorem, percentages such as VAT.
• Specific, set tax per unit such as duties.

Question 3

What is a subsidy?

Answer 3

• Payment from the government to a producer to lower their costs of production and encourage them to produce more.

Question 4

What is maximum price?

Answer 4

• The government may set a maximum price to encourage the consumption or production of a good.
• They have to be set below the free market price otherwise they would not encourage consumption or production.

Question 5

What is minimum price?

Answer 5

• The government may set a minimum price to discourage the consumption or production of a good.
• They have to be set above the free market price otherwise they would not discourage consumption or production.

Question 6

What are tradeable pollution permits?

Answer 6

• Firms are allowed to pollute up to a certain limit, and any surplus on their limit can be traded.
• This means that firms can buy and sell allowances between themselves.

Question 7

What are the advantages of tradeable pollution permits?

Answer 7

• Benefits the environment in the long run.
• Government could raise revenue from the permits.
• Raises revenue for greener firms as they can sell their excess permits.

Question 8

What are the disadvantages of tradeable pollution permits?

Answer 8

• Could lead to some firms relocating to where they can pollute without limits.
• Firms might pass the increase in costs onto the consumer.
• Competition could be restricted in the market.
• Could be expensive for governments to monitor emissions.

Question 9

What are the causes of government failure?

Answer 9

• Distortion of price signals, government subsidies could distort the price signals by distorting the free market mechanism. There could be an inefficient allocation of resources because the market mechanism is not able to act freely.
• Unintended consequences, consumers can act in unexpected ways to new policies.
• Excessive administrative costs, social benefits of implementing the policy might not be worth the financial cost of administrating the policy.
• Information gaps, some policy’s might be decided with imperfect information.