1.3 Government Intervention

Question 1

Indirect Taxes

Answer 1

is a tax on the expenditure that is ‘hidden’. It raises the firms costs and shifts the supply curve for the product vertically upwards by the amount of the tax

Question 2

Specific Tax

Answer 2

is an indirect tax where a specific amount of money is added per unit.

(it is represented as a vertically upward, parallel shift of the supply curve)

Question 3

Ad Valorem

Answer 3

Is an indirect tax, where the percentage is added to the selling price of each unit.

Question 4

Subsidy

Answer 4

is the amount of money paid by the government, per unit of output, aiming at lowering the costs and increasing the production and consumption of the product.

Question 5

When PED is elastic, and PES is inelastic

Answer 5

There is more tax burden for the producers than for the consumers as producers can’t pass the burden to consumers by increasing prices, because then consumers would stop buying the product.

Question 6

When PED is inelastic and PES is elastic

Answer 6

There is more tax burden for consumers than for producers as only a few consumers would stop buying the products as the product is a necessity.

Question 7

When PED = to PES

Answer 7

The tax burden is equal to both consumers and producers

Question 8

What are the consequences of imposing a tax?

Answer 8

1. Government:
   - Revenue earned through taxes
2. Consumers:
   - Increase in price level
   - Change in consumption patterns
   - Discourage spending
3. Producers:
   - Increase in production costs
   - Lower efficiency

Question 9

What are the consequences of imposing a subsidy?

Answer 9

1. Government:
   - Government spending= Opportunity cost
2. Consumers:
   - Paying lower prices
3. Producers:
   - Reduces costs of production
   - Could cause inefficiency
   - Inefficient allocation of resources